SEBI norms for Participatory Notes

To allay concerns over misuse of controversy-ridden P-Notes, regulator Sebi has notified new norms restricting transfer of these offshore instruments only to entities authorised for their use and that too after prior consent from the issuer foreign investor.

Details:

• As per the new notification, a foreign portfolio investor will have to ensure that any transfer of offshore derivative instruments issued by or on behalf of it, is made subject to two specific conditions — such ODIs are transferred to persons fulfilling Sebi norms for subscription and a prior consent of the FPI is obtained for such transfer, except when the persons to whom the ODIs are to be transferred to are pre-approved by the FPI.
• As per the Sebi regulations, no FPI can issue, subscribe to or otherwise deal in ODIs, directly or indirectly, unless they satisfy certain strict conditions. As per these conditions, the ODIs can be issued only to persons who are regulated by an appropriate foreign regulatory authority and they can be issued only after compliance to the prescribed ‘know your client’ norms.
• Also, only the top-two categories of FPIs, including sovereign funds, central banks and multi-lateral institutions, and certain broad-based funds including insurers and pension notes, can issue or deal in ODIs.
• The Category III FPIs, which mostly include hedge funds and individual investors, cannot issue, subscribe to or otherwise deal in ODIs, directly or indirectly.
• All these conditions would now also apply for transfer of the ODIs.

What are P-notes?

Participatory Notes or Offshore Derivative Units are issued by Sebi-registered foreign portfolio investors to other overseas entities looking for an exposure to the Indian markets without getting registered directly to save on costs and procedures.