By N Sundaresha Subramanian From Business Standard

Street Food decodes the recommendations of the SIT on black money that was critical on P-notes

Since the recommendations of the Special Investigation Team (SIT) on black money that was critical of participatory notes (P-notes) were made public about two weeks earlier, the government and Securities and Exchange Board of India (Sebi) have been in an explanatory mode. A lot of these emerged after a 500-point fall in the Sensex.

Sebi has reiterated it allows only entities from Financial Action Task Force-compliant nations to issue these and that it knows enough about the beneficial owners. These statements give an impression that all is well and the SIT has overreacted.

A plain reading of the finance ministry press release showed the SIT was clearly in grasp of what the regulatory framework of Sebi was. It accurately describes P-notes and lists the Sebi rules in this regard. It gives the details of which jurisdictions account for P-notes and so on.

Then, it goes on to make an important observation on how the Cayman Islands account for 31.3 per cent of P-note investments, totalling Rs 85,006 crore. “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 SIT said.

Adding: “The main point of the above elaboration is just that it does not appear possible for the final beneficial owner of ODIs (overseas direct investments) originating from Cayman Islands to be from that jurisdiction.”

This point has not been addressed adequately by Sebi. When Sebi says it knows the ultimate beneficiary, is it not referring to this Cayman Island guy? Don’t we all know this Cayman Island guy is probably only an accountant, lawyer or secretarial service provider? Who is the guy behind this Cayman Island accountant – that is what the SIT wants to know. If Sebi knew who was behind this Caymanian, then why was this data not given to SIT?

“In the case of companies/trusts represented by service providers like lawyers/accountants, Sebi should have information on the real owners/effective controllers of those companies/trusts, not end with name,” the SIT said. Showing it has studied and understood Sebi’s present framework and yet recommended changes because it not only sees a lot of potential for misuse but also some circumstantial evidence of this happening already.

P-notes are relics of the past. They came into being in an era when the foreign investments framework in India was in infancy. We live in a different world, one which has understood the importance of transparency and disclosures. Banks are being fined in billions of dollars for laundering. Even Swiss banks, whose USP is their secrecy, are not spared. We have a modern framework born out of two decades of learning and understanding. Our front door is as wide and welcoming as possible. Why should people still want to take the back alleys, unless they have something to hide?

Allowing a rogue nation like P-notes to continue is a mockery of the Indian foreign portfolio investor framework and the hundreds who have registered under it. Even the latest Tom Cruise starrer gives a glimpse of how such ghost money can be used and misused by rogue elements. Lawyers and middlemen, who earn hefty fees from these opaque vehicles, might continue to sing their praise, though.

Sebi should first disclose the identities of these Cayman people who own billions worth of Indian shares. Then, with oil and gold giving a cushion on the current account, taking a decision on scrapping this rogue nation would no longer be a Mission Impossible.

For more on this story go to: http://www.business-standard.com/article/markets/participatory-notes-a-rogue-nation-115081001023_1.html