As it continues its fight against suspected illicit funds being routed through stock markets, Sebi has initiated an internal study of suggestions made by the Supreme Court-appointed SIT on black money and the matter would be discussed by the regulator’s board later this month.
This comes at a time when Sebi has already acted against over 950 domestic entities for suspected tax evasion through the stock exchange platform, while at least 25 offshore entities are under its scanner for providing investment services to corporates and high net worth individuals (HNIs) here in a clandestine manner.
These offshore units set up in global financial hubs, including those linked to a few large European banks as also boutique investment service providers run by persons of Indian origins, are offering hybrid financial products to their clients in India while avoiding any regulatory oversight.
In case of the Indian individuals and companies, Sebi has barred them from the capital markets as an interim measure while further proceedings are currently underway. These cases have also been referred for further action to other agencies including the Income Tax Department and the Enforcement Directorate, a top official said.
With regard to the offshore units, the official said that their role is also being looked into for suspected manipulation of shares through a possible nexus with the company promoters and the brokers here.
In its latest report, the Special Investigation Team on Black Money had suggested that Sebi needs to further strengthen its monitoring mechanism to detect instances of the stock market platform being misused for tax evasion.
Sebi chairman U.K. Sinha recently said that the regulator has got a every effective surveillance system which generates over 100 alerts a day and almost all of the 950 entities, which have been barred in recent months, were brought to book after leads generated through these alerts.
Sebi is also sharing the information with the Tax Department and the Financial Intelligence Unit, while its actions are not limited to barring them from the markets and prosecution proceedings have been initiated in a number of cases.
Notwithstanding a robust mechanism in place, Sebi has initiated an internal discussion on the suggestions made by the SIT and the matter would be further discussed during the markets regulator’s next board meeting later this month.
If necessary, a public consultation process can be initiated if Sebi’s board is of the view that additional measures need to be taken to tackle the black money menace at its end, the official added.
Among other suggestions, the SIT had said that obtaining information on “beneficial ownership” of Participatory Notes (P-Notes) is of crucial importance to prevent their misuse and “Sebi needs to examine the issue raised above and come up with regulations where the ‘final beneficial owner’ of P-Notes or Offshore Derivative Instruments are known”.
While there have been no clear-cut cases of P-Notes being misused for laundering of black money, there have been indications that offshore units of some major foreign banks, including those headquartered in Switzerland and the U.K., have been used to manipulate share prices through a nexus with the promoters of the concerned companies.
Sebi is looking into these cases and would take necessary action against the Indian companies as well as the foreign entities found to be in violation of norms.
Sebi would also look into possible misuse of these units to launder unaccounted money through the domestic stock market but there are no clear indications in that regard yet.
The watchdog is taking a closer look at possible misuse of P-Notes to ascertain whether more stringent measures are needed to curb such activities, the official said.
There are complaints that some portfolio managers at some banks, which have a significant presence in Indian financial markets, could have helped clients route money back into the country as foreign funds using investment vehicles across jurisdictions.
Incidentally, Sebi whole-time member S. Raman on Thursday said that the regulator does not “dismiss the concerns raised by SIT with regard to P-Notes but Sebi has been very proactive on such matters much before these concerns were raised and will continue to be so”.
There are “sufficient checks and balances” on capital inflows by foreign investors into the domestic equities, he said on the sidelines of an event in Mumbai.
With regard to P-Notes, the regulator has put in place a strong deterrence to check any misuse of participatory notes and these can be issued only by well-regulated overseas entities such as sovereign wealth funds and pension funds of foreign governments.
After active deliberations, regulator had strengthened its P-Note regulations in 2011, after which restrictions have been put in place on who can issue these instruments and to whom these can be issued, while the information about the beneficiary owners needs to be mandatorily given to Sebi.
While Sebi has already put in place a robust system to check any misuse of the P-Note route, it is open to make any further changes if required, Sebi chairman U.K. Sinha said.
He, however, clarified that neither the SIT on black money nor the government has suggested closing the P-Note route and it was a business requirement for a certain class of foreign investors.
P-Notes are typically Offshore Derivative Instruments issued abroad by Foreign Institutional Investors (FIIs) or their associates against the underlying Indian securities.
While norms have been tightened considerably for P-Notes over the years, they remain popular among foreign investors since they allow them to invest in Indian markets without undergoing the significant cost and time implications of directly investing in India.
Following SIT’s recommendations earlier this month to plug any loopholes that may allow misuse of the P-Notes, the stock markets had tanked sharply on concerns that any move to clamp down on these instruments might lead to huge outflow of foreign funds.