Identification of ultimate beneficiary under p-note has always
been a challenge for market regulator since the framing of SEBI
(FII) Regulations in 1995. From time to time, SEBI has been
tweaking with the rules of game to enhance the disclosure and
reporting requirements in this regard but till date the existing
regulations have failed to yield the desired results. The recent
decision of the SEBI Board is in response to recommendations of
Special Investigation Team (SIT) set up by the Hon'ble Supreme
Court to trace out black money. The SIT had expressed concern with
regard to identification of beneficial owners and transferability
of p-notes. SEBI has therefore now proposed that all FIIs shall
uniformly comply with SEBI prescribed KYC norms (irrespective of
the jurisdiction of issuance of p-note or jurisdiction of
beneficiaries of such p-note) and they will give detailed
periodical reports. These measures are likely to result in more
transparency and positive impact on integrity of the market. The
ultimate outcome however will depend upon implementation of the new
mandate and quality of analysis that would be done by SEBI and
other agencies, of the information provided by the FIIs.
A grey area in the whole process which will still continue is
that if it is found by SEBI or other investigating agencies that
the money brought in by certain investors through p-note route is
violative of Prevention of Money Laundering Act ("PMLA"),
SEBI can take action against the FII, being an intermediary
registered with SEBI, but it will have little power to take any
enforcement action against the overseas investor except for
preventing such investor from further investment in the indian
securities market through the route of p-note or otherwise.
Investigating agencies concerned with enforcement of PMLA will also
have to depend upon foreign/international agencies to bring the
culprits to book and the whole process in this regard would be
cumbersome and time consuming. Nonetheless, regulatory and
enforcement agencies would be certainly better of in preventing
further pollution of the securities market with bad and illegal
money as compared to a situation where they do not have any
effective mechanism to detect circulation of such money.
Another proposal of SEBI to prescribe that the subscribers to
p-note will not be able to transfer the same to another subscriber
without prior approval of the issuer i.e. FII, is likely to affect
free transferability of p-note and thereby impacting its liquidity.
Appropriate reporting by FII about any transfer during the
preceding month would have perhaps served the desired purpose.
SEBI Board has also proposed to insert a guidance note in the
settlement regulations so as to make it clear that all other
breaches can be settled through the process of consent proceedings
except the breaches which have market wide implications. The
relevant provisions to this effect are indeed already contained in
the SEBI regulations and the need for inserting guidance note
appears to have stemmed from the realization that the existing
provisions are not clear enough. The guidance note is expected to
make the market participants better understand the provisions and
to avail the consent process. While it may be true to a certain
extent but there is another reality also that several consent
applications are rejected by the SEBI officials on other grounds as
well. There is an element of arbitrariness in the process of
rejection of consent applications by the persons concerned. Since
the remedy of filing appeal before SAT against such rejection is
generally not available, there is an urgent need to put in place
some review mechanism within SEBI at the level of Chairman. A
procedure may be evolved whereby any rejection of consent
application is placed before the review committee headed by
Chairman before the decision of rejection is communicated to the
persons concerned. This may go a long way in checking the arbitrary
actions of SEBI officials in rejecting the applications which are
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