India's capital market regulator on Thursday took steps to stop suspected illegal money flowing into the country by making issuers of securities known as offshore derivative instruments register their customers. The Securities and Exchange Board of India (SEBI) also tightened rules for transferring ownership of these offshore instruments to other investors. And the watchdog said issuers must report any suspicious transactions to regulators.
The watchdog's action provides more evidence that India is stepping up measures to crack down on foreign money flowing into the country illegally. These have included amendments to tax treaties with certain countries which will affect wealthy Indians who route cash through these countries to avoid Indian taxes, a practice known as "round tripping." Last week, for example, the Indian government said it would start imposing capital gains tax on investments coming from Mauritius starting next year, after the two countries agreed to amend a three-decade old treaty.
The stricter rules on offshore derivatives will mainly impact so-called participatory notes, or P-Notes, derivative products that track domestic equity markets and have been popular with foreign investors because of their less stringent registration process. Stronger action had been expected after a Supreme Court-appointed special investigations team said last year that the watchdog needed to provide greater oversight of money laundering in stocks as well as "black money" being repatriated to the country, including through tougher scrutiny of P-Notes.
"(Offshore derivative) issuers shall be required to identify and verify the beneficial owners in the subscriber entities," the watchdog said, adding the rules would apply to investors with holdings above a minimum threshold. The new rules were announced after the watchdog's quarterly board meeting in Mumbai. As of March, foreign portfolio investors had outstanding offshore derivative instrument positions of 2.23 trillion rupees, according to the watchdog's website.