As transparency norms rise, the supply will ebb. The Supreme
Court-appointed Special Investigation Team on black money has flagged
participatory notes (P-Notes) issued by foreign institutional investors
as a possible conduit for illegal funds in the capital market.
Transparency as to the identity of those investing in the market is
necessary. However, abrupt changes would be disruptive. The ideal
strategy is to lower the transaction cost of registering as an investor
in India, so as to encourage most investors to come in directly rather
than as part of a larger institutional investor, phase out most P-Notes
in a stipulated timeframe, while allowing a small category of entities
like university endowments, about whose credentials the regulator has
total comfort, to continue to invest via P-Notes.
Sebi, has
thoroughly revamped the disclosure requirements and eligibility
conditions for participation in the offshore derivative instruments, and
the rules now are far more stringent than before 2007, when Sebi, under
M. Damodaran, had banned them.
P-Notes returned, in the wake of
the financial crisis and capital flight, but with greater mandated
transparency. P-Notes can only be issued to entities from countries that
have signed a multilateral agreement to combat money laundering and for
exchange of information with the International Organisation of
Securities Commissions. Besides, the funds routed via P-Notes have
dropped substantially in recent years and now account for only about 11%
of the secondary market. So, there is no case for any abrupt regime
change.
However, for the sake of transparency, P-Notes are
entirely avoidable, and do need to be phased out in a timebound manner.
The new global rules in the making on transparency, complete with a
system of unique legal entity identifiers that would make beneficial
ownership visible at the end of even complex holding company chains,
would remove the virtue investors seek in P-Notes: anonymity. The supply
of P-Notes would come down, in other words. A time-bound plan to
phase-out P-Notes would make eminent sense.
(Source: Editorial in The Economic Times dated 29-07- 2015.)
