ET NowIn an exclusive interaction with ET NOW, Rajiv Agarwal, WT Member, SEBI talks about the situation at this point of time as far as P-Notes are concerned and its future course. Excerpts:
Rajiv Agarwal: The situation at this point of time as far as the P-Notes are concerned is completely different from 2007. The exposure of the P-Notes has come down from 55.7% of the total assets under control of the FPIs to approximately 10%. So, their importance is substantially reduced. Number two thing is that - we had already put in a very robust mechanism particularly after November 2014 circular, which was good enough.
But still the SIT pointed out few deficiencies to rule out any possibility of misuse. We have tightened those loose ends also. We are going to capture the intra-month transfers. We have mandated the P-Note holders to take permission of the FIs before transfer and we have applied the Indian norms for the KYC of the beneficial owners. So, these are three things which we have done. This makes the whole mechanism very robust.
As far as you were mentioning that this time markets behaved very maturely, I would like to mention that SEBI was in constant consultation with all the FPI issuers. So, we took all the P-Note issuers on board and the measures which we took, we had discussed the implications with them at great length. So when we came out with the provisions, I think there was…
ET Now: There was no element of surprise involved.
Rajiv Agarwal: …surprise and there was absolutely no panic.
ET Now: As you are rightly and interestingly putting out the statistics when it comes to P-Notes it is hardly 10% as on March end of 2016. So, do we see the way things are panning out. P-Notes as an instrument getting faded away say may be in the next three to five years or may be over a eventually a period of time may be P-Notes can be phased out any line of thinking of deliberation that went while deciding these things?
Rajiv Agarwal: SEBI has been working on making the process of FPI registration simpler and simpler. So, as the process is becoming simpler more and more investors may like to get registered as FPI. But we have to keep in mind that every investor, who is coming through P-Notes is not having the wherewithal's to get registered as FPI. For example: There are many funds who want the flavour of India so just for taking a small exposure, they may not like to get registered as FPI at this point of time. May be in future, they may like to come as FPI also. So, this serves the purpose but I do admit that as the process of FPI registration is becoming simpler may be more and more investors may get registered as FPI. So, the use of P-Note may in future become still lesser so that will, I would not be able to predict but this will depend upon the market.
ET Now: When it comes to mutual fund industries particularly a debt side, we have seen certain issues popping up in the last three to six months particularly because of the rating agencies giving a particular rating and for some reason the ratings are downgrade all of a sudden and the counterproductive effect on the debt side of the mutual fund holdings. Is that an issue that SEBI is worried about and do we see some sort of tightening happening particularly on the rating agencies?
Rajiv Agarwal: We have taken cognisance of the developments which have taken place in the last few months and we are deliberating on various issues relating to the rating by the credit rating agencies because their functioning effects has a much wider impact on the market. We are deliberating on few issues and in future you will see that we will tighten the supervision of the credit rating agencies.
Rajiv Agarwal: The situation at this point of time as far as the P-Notes are concerned is completely different from 2007. The exposure of the P-Notes has come down from 55.7% of the total assets under control of the FPIs to approximately 10%. So, their importance is substantially reduced. Number two thing is that - we had already put in a very robust mechanism particularly after November 2014 circular, which was good enough.
But still the SIT pointed out few deficiencies to rule out any possibility of misuse. We have tightened those loose ends also. We are going to capture the intra-month transfers. We have mandated the P-Note holders to take permission of the FIs before transfer and we have applied the Indian norms for the KYC of the beneficial owners. So, these are three things which we have done. This makes the whole mechanism very robust.
As far as you were mentioning that this time markets behaved very maturely, I would like to mention that SEBI was in constant consultation with all the FPI issuers. So, we took all the P-Note issuers on board and the measures which we took, we had discussed the implications with them at great length. So when we came out with the provisions, I think there was…
ET Now: There was no element of surprise involved.
Rajiv Agarwal: …surprise and there was absolutely no panic.
ET Now: As you are rightly and interestingly putting out the statistics when it comes to P-Notes it is hardly 10% as on March end of 2016. So, do we see the way things are panning out. P-Notes as an instrument getting faded away say may be in the next three to five years or may be over a eventually a period of time may be P-Notes can be phased out any line of thinking of deliberation that went while deciding these things?
Rajiv Agarwal: SEBI has been working on making the process of FPI registration simpler and simpler. So, as the process is becoming simpler more and more investors may like to get registered as FPI. But we have to keep in mind that every investor, who is coming through P-Notes is not having the wherewithal's to get registered as FPI. For example: There are many funds who want the flavour of India so just for taking a small exposure, they may not like to get registered as FPI at this point of time. May be in future, they may like to come as FPI also. So, this serves the purpose but I do admit that as the process of FPI registration is becoming simpler may be more and more investors may get registered as FPI. So, the use of P-Note may in future become still lesser so that will, I would not be able to predict but this will depend upon the market.
ET Now: When it comes to mutual fund industries particularly a debt side, we have seen certain issues popping up in the last three to six months particularly because of the rating agencies giving a particular rating and for some reason the ratings are downgrade all of a sudden and the counterproductive effect on the debt side of the mutual fund holdings. Is that an issue that SEBI is worried about and do we see some sort of tightening happening particularly on the rating agencies?
Rajiv Agarwal: We have taken cognisance of the developments which have taken place in the last few months and we are deliberating on various issues relating to the rating by the credit rating agencies because their functioning effects has a much wider impact on the market. We are deliberating on few issues and in future you will see that we will tighten the supervision of the credit rating agencies.
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