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Could SEBI crackdown on P notes rattle markets?
Jul 27, 2015

That the stock markets have been a channel for money laundering is no news. As we all know, participatory notes (P notes) have been one of the biggest vehicles for turning the colour of money from black to white. At the core of this scam is tax evasion by misusing the provision of long-term capital gains. Not just that, P notes are also one of the reasons behind speculation in stocks, of which the ultimate victims are the retail investors. Already, 900 entities have been banned on an interim basis from securities markets. As fight against black money gains momentum, the P notes are under the scrutiny. As per an article in Business Standard, the regulator SEBI is likely to review the norms for P note investors.

It was in 2007 that P notes had been cracked down upon. What followed was a correction of 10% in the markets within a matter of minutes that led to a halt in trading. A lot has changed for the better since then. The share of P notes in foreign holdings has come down from over 50% to a little over 10% now. The regulations have become tighter. However, the notes are still transferable which makes it difficult to track the final beneficiary. And that makes the markets susceptible to their misuse.

The value of participatory note holdings stands at Rs 2.4 trillion and forms around 10.3% (both equity and derivative) of total FPI holdings. Hence, one should not be surprised to see markets correct in case SEBI decides to clamp down on P notes. However, if that happens, we believe it will be a good opportunity for long term investors to invest in fundamentally strong stocks.

Data Source: SEBI, Business Standard
*Both equity and derivative , excluding debt

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