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 otherwise maintainable.

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