Never miss a great news story!
Get instant notifications from Economic Times
AllowNot now


You can switch off notifications anytime using browser settings.
11,937.5016.0
Stock Analysis, IPO, Mutual Funds, Bonds & More

Smelling anomaly, watchdog may tighten rules for P-notes

Markets regulator Sebi has found instances where foreign brokers have issued P-notes against Indian derivative contracts to overseas clients, who don’t own the underlying local shares, thereby violating the regulation underpinning P-notes.

, ET Bureau|
Updated: Oct 17, 2019, 09.52 AM IST
0Comments
ET Online
Sebi12
Despite Sebi’s 2017 diktat, some of the leading FPI brokers continued to issue P-notes based on their proprietary books.
Mumbai: The Securities and Exchange Board of India (Sebi) is planning to further tighten rules for participatory notes (P-notes), offshore derivative instruments issued by brokers to foreign investors not registered in the country, said people with knowledge of the matter.

The capital markets regulator has found instances where foreign brokers have issued P-notes against Indian derivative contracts to overseas clients, who don’t own the underlying local shares. Instead, these brokers showed the shares they owned as the underlying instruments. As per regulations, P-notes in derivatives can only be issued for hedging, which means clients need to own the shares if they wish to buy the instrument.

Sebi may now ask brokers to keep shares they are treating as underlying instruments against Pnote derivative positions in a separate account, said two people aware of the development. The move would mean that foreign portfolio investor (FPI) brokers will be forced to buy new shares or transfer the existing ones in their own portfolio to the P-note subscriber account. Such a move will also increase tax liability, something the brokers are opposed to. P-notes can be issued by brokers against shares or futures and options positions.
sebi-grp

The measure is likely to be a part of new operating guidelines for FPIs to be issued in next few weeks. The proposal will impact at least two of the top five P-note issuers in the Indian markets, which together have a market share of around 30 per cent, said one of the persons. The total value of P-notes issued stood at Rs 79,800 crore in August, Sebi data showed.

In 2017, the regulator had banned Pnote subscribers from taking any unhedged positions in the Indian derivative markets as part of its attempts to discourage use of the instrument. The government and Sebi have frowned upon the popularity of P-notes in the past as they are considered opaque because of constraints in identifying the end investor.

Until then, there were no restrictions on P-note subscribers in terms of trading or dealing in the markets. Hence, foreign brokers were issuing P-notes and underlying securities were held in their proprietary books.

Despite Sebi’s 2017 diktat, some of the leading FPI brokers continued to issue P-notes based on their proprietary books.

“In some cases, shares purchased for hedging purposes were kept in the prop accounts, while in a few others, no fresh purchase was made in order to comply with Sebi’s hedging rules,” said one of the persons. “If the proposed rule is implemented, the shares that have been purchased to hedge the P-notes issued need to be transferred to a different account and hence will be subject to several taxes, including capital gains and securities transaction tax.”

Also Read

Sebi tightens rules on P-notes, to need separate registrations

Investments via P-notes rise in Oct after registering fall for 4 months

Investments via P-notes decline to Rs 81,913 crore in June

Investments via P-notes fall for fourth month in a row, stand at Rs 76,611 cr

Comments
Add Your Comments
Commenting feature is disabled in your country/region.
Download The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.

Other useful Links


Follow us on


Download et app


Copyright © 2019 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service