Sebi tightens screws on dubious inflows from loosely regulated, offshore entities
MUMBAI: As the market touches a new high, Sebi is clamping down on dubious inflows from loosely regulated, offshore entities, particularly those located in the Gulf.
According to a Sebi communique on Monday evening, foreign funds investing on behalf of unknown investors and through opaque structures will now find it difficult to play on Dalal Street. The move — aimed to curb money laundering and additional control through indirect ownership of shares — could impact the equity market, said some of the stock advisors.
These entities, often seen as vehicles for round-tripping of funds and money laundering, can no longer subscribe to participatory notes to trade in Indian stocks. PNs are offshore derivative instruments used to trade in underlying Indian shares.
They are preferred by investors that are not registered with Sebi. While this is a convenient investment route for many genuine foreign investors, it is always suspected that PNs are misused by resident Indians to carry out round-tripping transactions and indirectly hold shares
The directive comes amid the government’s statement to clamp down on black money and a growing buzz that a substantial part of undisclosed funds in Swiss bank accounts of Indians have been moved to shell entities in Gulf.
The regulator on Monday said foreign portfolio investors, or FPIs, can issue PNs only to investors and funds that are regulated and incorporated in a jurisdiction where the securities regulator and the central bank are part of apex international organisations that lay down best global practices. Besides, such PN holders cannot be residents of countries that figure in the list of nations that are yet to comply with anti-money laundering rules.
“The circular has aligned the definition of what would constitute ‘appropriate foreign regulatory authority’ for PN and FPI purposes. However, the requirement of the entity itself to be regulated to subscribe to PN hasn’t been done away with.
Further, restriction on use of opaque structure would mean that any structure where there is no sight of ultimate beneficial owner would become ineligible. This seems to be to deal with the potential money laundering risk under the PN structure,” said Siddharth Shah, partner at Khaitan & Company
Current rules allowed unregulated overseas funds to subscribe to PNs as long as the fund manager was regulated. This concession has now been scrapped
“This will ensure that the little room which was available for a relatively less regulated entity to subscribe to PN, will now stand blocked. A prohibition on issuance of PNs to an entity with an opaque non-transparent structure will also ensure that the KYC (know your customer) to be done by a FPI on a PN purchaser gets further tightened and the possibility of inflow of black money or terrorist financing gets further obstructed,” said Tejesh Chitlangi, partner, IC Legal.
According to UR Bhat, MD, Dalton Capital, “There will be negative reaction in the market. However, one should also consider the fact that good number of PNs in terms of value has been issued to registered entities also.”
Investments into Indian stock markets through PNs surged to Rs 2.65 lakh crore last month. According to the data released by Sebi, PN inflows constituted 12.2% of total foreign portfolio inflows in October, up from 10.7% in September. “This will be a setback for Indian stock market as investor sentiment is likely to weaken considerably as the Sebi move will hit overseas inflow into the Indian equity market,” said Sudip Bandyopadhyay, MD & CEO, Destimoney Securities. “The subscribers of the P-notes were predominantly those who do not want to waste their time and energy in registration process,” he said.