Sebi’s move will make it difficult for controversial PNotes and other ODIs to manipulate stock prices
Market watchdog, Securities and Exchange Board of India (Sebi) has rightly moved to tighten the screws on offshore derivative instruments (ODIs) used purely to manipulate select stock prices and profiteer through speculative trades.
Foreign Portfolio Investors (FPIs) will have to use the three-year deadline offered by Sebi to completely unwind ODIs issued purely for speculative purpose. The $1,000 regulatory fees proposed by Sebi on ODIs and each of the investors taking recourse to speculative deals is essentially a prohibitive measure. But this will hardly be a deterrent, for it is well known that a PNote is also a politician note or promoter note and for them the stakes are very high. PNotes allow the individual or entity to mask his identity through a FII sub account and till they are allowed hot money flows and round tripping will carry on. Unless used for hedging, there’s no reason why derivatives should become the vehicles for FPIs to bring in illicit, unaccounted funds lying abroad into Indian markets.
Mostly, controversial participatory notes and other ODIs have been used by unscrupulous operators to even move terror funds, launder money across borders and help Indian firms as well as individuals to bring back funds parked abroad after having evaded taxes.
When SEBI finally implements its proposal to ban use of ODI for speculation, another firm measure towards ringing in “transparency and accountability” of ODI issuers, their sponsoring FPIs registered in India and the subscribers.
If one were to go by SEBI data, Rs 40,165 crore worth ODIs have been issued against derivatives for purely speculative purpose. This exposure taken by foreign investors or funds pumped in by Indian firms from abroad account for about 24 per cent of the total notional value of outstanding ODIs in the markets.
ODIs route continues to be abused by both foreign and domestic companies notwithstanding A sustained campaign by Sebi to clean up the “foreign funds flow into the markets.” Pull this out and you will have a market collapse. A consultation paper by put out by Sebi on 16 October 2007 proposed curbs on PNotes. The markets crashed on October 17 and on October 18, Chidambaram had rushed to soothe ruffled foreign institutional investor (FII) feathers, saying there was no question of banning PNotes. In July 2015, Arun Jaitley’s hastily called press conference to assure foreign investors that the government will not take any “knee-jerk action” on PNotes and tried to assuage investors. Jaitley’s presser came after news broke on Saturday that the special investigation team (SIT) on black money had criticised the Sebi on the poor monitoring of PNotes.
While a large chunk of ODIs and participatory notes valued at $26.21 billion have an underlying portfolio that’s hedged, un-hedged or linked to index funds, issuers cannot take the plea that they have been unable to segregate the investments made purely for speculative purposes.
Last month, Sebi chairman Ajay Tyagi had made the first move by barring Indians and NRIs from investing through the ODI and participatory notes route in the Indian stock markets.
In 2015, the Special Investigation Team (SIT) set up by the Narendra Modi government had detected huge inflow of “round-tripped” funds through the ODIs. Offshore branches of major foreign banks based out of US, Switzerland, France and Netherlands have apparently joined hands with promoters of Indian companies to manipulate select stock prices and profiteer.
It’s not the first time that SEBI has moved to plug the loopholes in FPI-peddled PNotes and ODIs. When Sebi mandated FPIs in 2014 to make disclosures on actual beneficiaries of such investments, the impact was limited despite amendments to tax exemption treaties with countries such as Mauritius and Singapore.
Given the buoyancy in the stock markets and relatively lower dependence on foreign funds, it’s definitely the right time for Indian government, market regulator and RBI to swiftly move against black money peddlers. Apart from plugging the illicit funds flow through FPI triggered ODIs and PNotes, the market regulator will have to identify the middle east and far-east based funds that have assiduously operated in Indian markets to take significant exposure in blue-chip companies with sole intention of playing dirty.
From the security angle also, fool-proofing the Indian markets from “extraneous disruptive elements” must be prioritised. Erstwhile principal secretary to prime minister and national security advisor, Brajesh Mishra’s national security doctrine that made several recommendations to set up firewalls for Indian markets must be the starting point.
As a first step, the powers that be, may consider banning unregistered ODI issuers all together. Adequate care, however, will have to be taken for smooth operation of genuine foreign investors in Indian markets.