No hasty action on black money SIT, FM assures investors

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SME Times News Bureau | 28 Jul, 2015
Reacting to an SIT report suggesting that market regulator SEBI needs to monitor participatory note misuse for money laundering, the government on Monday said it would avoid any knee-jerk decision that could hurt investor sentiment.

The government also said it would study the Special Investigation Team (SIT) recommendations in due course of time.

"No step would be taken which could adversely impact investment sentiment in the country. But the government will certainly not take any such action in a knee-jerk fashion, particularly one which has any adverse impact on investment environment," Finance Minister Arun Jaitley told reporters in his Parliament House office.

"The government will apply its mind in due course keeping in mind the investment environment of the country as also the objective behind the SIT recommendations and then take a final view on the matter," he added.

Key Indian equity indices lost over 1.8 percent on Monday, with investor mood spooked by proposals to regulate foreign funds better. The investors were anxious to know if the government will indeed accept the SIT suggestions, thereby sending the markets crashing.

"The government will study those recommendations, and take decision after due consultation with all stakeholders," Revenue Secretary Shaktikanta Das also told reporters here.

"At this point, there is no need for the market to respond or react in any manner and not show any panic," he said.

"The KYC (know-your-customer) and other requirements under P-notes regime have been improved over the last few years," he added.

The Supreme Court-appointed SIT on black money on Friday said Securities and Exchange Board of India (SEBI) must have a monitoring mechanism for unusual rise of stock prices and study the misuse of participatory notes for money laundering.

"The SEBI needs to have an effective monitoring mechanism to study such unusual rise of stock prices of companies while such a rise is taking place," the SIT said in its report titled 'Misuse of exemption on long-term capital gains tax for money laundering'.

"Once such instances are detected, SEBI should invariably share this information with the Central Board of Direct Taxes (CBDT) and Finance Intelligence Unit (FIU)," it said.

"Enforcement Directorate (ED) should then be informed to take action under the Prevention of Money Laundering Act for the predicate offences," the report added.

The SIT cited SEBI investigations on companies with poor financial fundamentals in terms of past income raising huge capital by allotment of preferential shares to various entities. This is followed by a sharp rise in share prices, once the preferential allotment is done, through circular trading.

The market regulator has also been asked to put in place a mechanism to monitor the beneficiaries of participatory notes.

"Obtaining information on "beneficial ownership" of P-notes is of crucial importance to prevent their misuse. SEBI needs to examine the issue and come up with regulations where the 'final beneficial owners' of P-notes are known," the SIT said.

Regarding P-notes, the SIT noted that based on the data provided by SEBI, a major chunk - over 31 percent - of outstanding Offshore Derivative Instruments (ODIs) invested in India are from Cayman Islands.

"This translates to roughly Rs.85,006 crore. The Cayman Islands had a population of 54,397 in 2010, according to Wikipedia. It does not seem conceivable that a jurisdiction with a population of less than 55,000 could invest Rs.85,000 crore in one country," the report said.

Precisely seven years, nine months and ten days ago, a similar issue had sent key indices tumbling.

On the evening of October 16, 2007, after the trading hours, the SEBI had sought to regulate the use of P-Notes -- the most preferred route or instrument -- to invest in Indian stock markets.

The next day, the investor reaction was something the policy-makers wouldn't have anticipated. The BSE Sensex opened as much as 1,013.96 points lower on October 17, 2007, at 18,037.90 points, over the previous close at 19,051.86 points.

Within a minute or so, it crashed further to 17,307.90 points -- that is, a loss of 1,743.96 points or 9.15 percent, over the previous day's close, which was the biggest fall in absolute terms and among the steepest in percentage terms.

P-Notes or just PNs, are financial instruments used by foreign funds to invest in the Indian stock markets on behalf of their overseas clients who do not wish to register themselves with the markets regulator. In the process, the anonymity of the clients is maintained.