Sebi meet to take up P-note misuse

Mumbai, Aug. 23 (PTI): Market regulator Sebi will discuss tomorrow the suggestions of the Supreme Court-appointed special investigation team (SIT) on the misuse of participatory notes to launder black money.

The market cop has barred over 1,000 local entities for suspected tax evasion through stock markets.

Sebi's board will look into any further steps that may be required to check the misuse of participatory notes (P-notes).

While Sebi and the government feel that the P-note regulations are robust enough to check any misuse, the board will discuss whether more stringent measures are needed to curb the flow of black money from within the country and abroad, sources said.

In its latest report, the SIT has suggested that Sebi needs to strengthen its monitoring mechanism to detect instances of the stock market platform being misused for tax evasion. Also Sebi needs to review its regulations on P-notes to help identify the end-users of these instruments.

P-notes are issued by foreign portfolio investors registered with Sebi to other overseas investors who want to take a position in the Indian markets without any direct registration for trading. These instruments are popular as they provide a low-cost and easier route to invest in the Indian markets.

A few years ago, Sebi had put in place strong checks and balances to avoid the misuse of this route. P-notes can be issued only after strong KYC requirements are followed. They cannot be issued to high-risk investors.

In May, investments through P-Notes hit a seven-year high of Rs 2.85 lakh crore. It stood at Rs 2.75 lakh crore at June-end. The offshore derivative instrument accounts for nearly 15-20 per cent of the total FII investment in India since 2009.

Sebi has busted an "innovative" scheme wherein high net worth individuals (HNIs) were incurring "bogus losses" to offset tax liabilities.

The probe, which has resulted in an interim ban on 59 entities, including HNIs and their shell companies, found that more than half of these individuals and companies showed notional losses of Rs 338.3 crore through trading in illiquid stock options.

The remaining entities generated "bogus profits" worth Rs 406.9 crore, mostly done to show artificial increase in the net worth of a private company or individuals.

The bogus losses were also shown to evade tax by offsetting the capital gains tax on profits.