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FPIs prefer direct access to stock markets over P-notes: PwC

by August 17, 2016 General

Press Trust of India  |  Mumbai

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With tighter norms surrounding P-notes and clampdown on beneficiaries of such products, about 73 per cent overseas investors would prefer direct access to Indian capital markets over offshore derivative instruments (ODIs), says a latest PwC survey.

Share of investments through P-notes in FPI (foreign portfolio investors) inflows into the country have fallen to a mere 8.8 per cent in June this year, from 55.7 per cent in the same period of 2007.

Till March this year, investments from P-notes represented 10 per cent of the total FPI inflows.

According to a survey of over 200 FPIs across the globe, PwC found that 73 per cent of the respondents indicated that they would prefer direct access to the market over ODIs.

“The response is clearly a reflection of Sebi’s recent clampdown on P-notes or ODIs,” PwC partner (tax and regulatory services) Suresh V Swamy told reporters here.

Offshore Derivative Instruments (ODIs) — commonly known as P-Notes — provide the foreign investors an easier and cost-effective route to invest in Indian markets without directly registering as FPIs.

P-notes have traditionally been used by investors who wanted to gain access to Indian markets without the hassle of complying with mandatory tax and regulatory rules. However, this route was viewed by regulator Sebi as largely opaque, giving them neither information nor control over the ultimate beneficiary.

Pursuant to the Supreme Court appointed SIT recommendations, Sebi made rules more stringent and sought more information about these beneficiaries.

“Direct access to markets is much simpler as end-user information is not required to be handed out,” Swamy noted.

Besides, ODI issuers under the new Sebi guidelines have to put in place necessary system and carry out a periodical review and evaluation of its controls, systems and procedures.

Moreover, the investors are required to obtain the permission of FPIs prior to the transfer of ODIs.

“These changes, coupled with renegotiation of tax treaties, are likely to make P-notes less lucrative,” Swamy said.
The survey also said that 77 per cent of the FPIs find

the country’s regulatory environment challenging compared to other emerging markets, while 88 per cent viewed the current tax regime as a challenge.

Swamy noted that FPIs do not favourably view Sebi’s plan to tighten High Frequency Trades (HFT) and feel that any “speed bumps” in it could dry up the liquidity in the financial markets. FPIs are biggest users of HFT.

“GAAR (General anti-avoidance rule), offshore transfer provisions, safe harbour provisions withdrawal of capital gains benefits under the India-Mauritius treaty and its collateral impact on the India-Singapore treaty are adding to the challenging environment,” Swamy said.

On the positive side, about 67 per cent respondents saw India as a preferred investment destination among emerging markets, while 63 per cent of investors believe that capital gain tax in India is satisfactory.

Another 77 per cent FPIs surveyed were found to be satisfied with the ultimate outcome of minimum alternate tax (MAT) controversy.

Over 60 per cent of FPIs are satisfied with Sebi’s responses to their queries, while 73 per cent also found Sebi’s increase in FPI limits in a company as “adequate”.

Currently, FPIs are not permitted to purchase equity shares of more than 10 per cent of the total issued capital of a company.