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Participatory Notes commonly known as P-Notes or PNs are instruments issued by registered Foreign Institutional Investors (FII) to overseas investors, who wish to invest in the Indian stock markets without registering themselves with the market regulator, the Securities and Exchange Board of India (SEBI)

Markets Regulator, SEBI on Monday, 29th May 2017, proposed to levy a regulatory fee of USD 1,000 for each Participatory Note (P-Note) issued by foreign investors and bar issuance of such derivative-based instruments for speculative purposes to check any misuse of these products for channelizing black money as the concerns remain that P-Notes are misused by some to channelize black money from abroad into the country through the stock markets.

In a consultation paper issued on Monday, SEBI said it has been continuously making regulatory changes in order to ensure that the Offshore Derivative Instrument (ODI) route is not misused.

In the context of the Indian market, ODIs are investment vehicles used by overseas investors for an exposure in Indian equities or equity derivatives. These investors are not registered with SEBI, either because they do not want to or due to regulatory restrictions.

SEBI incurs a significant expenditure in terms of capital and manpower when it comes to monitoring of investments coming through the ODI route.

It is proposed that beginning 1st April 2017, for a period of every three years, regulatory fees of USD 1,000 be levied on each ODI issuing Foreign Portfolio Investment (FPI) for each and every ODI subscriber coming through such FPI.

SEBI said quite a few ODI subscribers invest through multiple issuers and the proposed fee will discourage the ODI subscribers from taking ODI route and encourage them to directly take registration as an FPI.

Besides, SEBI has proposed to prohibit ODIs from being issued against derivatives for speculative purpose. Further, the ODI issuers would be given time till December 31, 2020, to wind up the ODIs issued against derivatives which are not for hedging purpose.

Presently, ODIs are being issued against derivatives along with equity and debt. As of April 2017, the ODIs issued against derivatives had a notional value of Rs 40,165 crore, which is 24 per cent of the total notional value of outstanding ODIs.

P-notes are issued by registered FPIs to overseas investors who wish to be a part of the Indian stock markets without registering themselves directly. They, however, need to go through a proper due diligence process.

SEBI has sought suggestions from public on the proposals till 12th June 2017 and a final regulation will be put in place after taking into the considering views of all the stakeholders.

Taruna Verma

Senior Associate

The Indian Lawyer

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