Sebi denies circulation of participatory notes in stock market

Markets regulator Sebi has denied before the Supreme Court the allegations made in a PIL about circulation of participatory notes (P-Notes) in the stock markets.

“All entities operating in the securities market, including foreign portfolio investors (FPIs) are governed in the framework put in place under the Prevention of Money Laundering Act, 2002 and Unlawful Activities (Prevention) Act, 1967,”it said.

“It is therefore denied that there is any vested interest or any suspicious fund without having ultimate beneficial owners (UBOs) details has been allowed by Sebi chairman/ directors in the stock market,” it said.

In an affidavit, the market regulator asserted that it has put in place necessary guidelines as per the mandate given to it under the Prevention of Money Laundering Act 2002 and Unlawful Activities Prevention Act, 1967, and has made necessary modifications from time to time.

“The allegation that there is no information of UBOs in case of FPIs and PNs is not correct. The FPIs can invest in India only if they are registered with the Sebi. It is also denied that investment through P-Notes and ODIs (offshore derivatives instruments) are allowed without compliance of the KYC rules,” it stated.

It also maintained that the concerns expressed by the SIT on black money about participatory notes have been addressed by making necessary amendments in legal framework by issuing circulars on June 10, 2016. Sebi strongly rejected the charge by PIL petitioner advocate M L Sharma that more than Rs 25 lakh crore of P-Notes are in circulation in India in stock/financial market due to illegal protection by the regulator.

Sharma has raised the issue of P-Notes in his pending PIL that has sought a CBI probe against Indian offshore bank account holders named in the Panama papers.

The FPIs and ODI/PN subscribers are two different class of investors. FPIs get directly registered with the Sebi and invests in Indian securities market. On the other hand, FPI issues financial instruments known as ODIs and PN to entities outside Indian against the underlying securities held by them in Indian securities market, it pointed out.

“The ODIs and PN are never circulated in Indian stock markets.”   Though monitoring and investigation of offshore bank accounts is not Sebi’s mandate, all transactions in secondary market is allowed through banking channels only, it said.