NEW DELHI : Participatory notes (P-notes) are poised for a comeback, this time through the International Financial Services Centre (IFSC), Gift City, Gujarat, after nearly a decade of being discouraged by Indian regulators.
Some leading global banks that currently issue P-notes from global jurisdictions, such as Singapore, are considering shifting to Gift City as the special economic zone offers both tax sops and regulatory clarity, a senior stock exchange official said.
The official added that these banks are also receiving interest from ultra-wealthy global traders and smaller hedge funds interested in taking exposure to India without having to set up shop in India.
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Some of the banks have already started pitching these instruments to their clients and are expected to launch full-scale issuances by the end of the year.
P-notes allow foreign funds to take indirect exposure to India without applying for a licence with Indian regulators. Typically, large international banks with foreign portfolio investor (FPI) licences are the biggest issuers of P-notes. In P-notes, the banks purchase the shares or derivative contracts on behalf of the clients. They hold these securities and issue a certificate, which is called a P-note of such holding, which is called a P-note, to the client.
“In the last decade, the bulk of the P-note market has moved offshore amid regulatory crackdown in India. But such instruments are vital for a country to attract a wider pool of foreign investors,” said the stock exchange official cited above. “A lot of discussions are now happening between the banks and regulators regarding P-note issuances,” the official said.
The exemption of taxes in the Union Budget 2023-24 on income distributed by banks located in IFSC has sparked renewed interest in P-notes. The tax tweak effectively puts IFSC Gift City on a comparable footing to any global jurisdiction.
Tax is a major risk for P-note subscribers as the tax department has in the past declined treaty benefits to beneficiaries. To avail of tax benefits under double tax avoidance agreements (DTAAs), the non-resident needs to meet several criteria set by the tax department.
In IFSC, the story is different as every tax benefit has been codified into law. Hence, there is no need for treaty exemptions, say market participants.
“While investing from overseas jurisdictions, entities would have to rely on treaty benefits to lower the tax rate on dividend and capital gains,” said Suresh Swamy, a partner at Price Waterhouse & Co. Llp. “Investing from Gift-IFSC will provide more certainty with respect to taxation as entities will no longer be required to avail treaty benefits. All the benefits are coded in the domestic tax law itself.”
The IFSC route opened when P-note volumes declined significantly in the onshore Mumbai markets.
“We have seen the quantum of P-note issuance come down substantially in the last 6-7 years. The recent relaxations given in the Union budget have made it attractive to issue P-notes from Gift City,” said Amar Kampani, a former banker. “This will also give a fillip to Indian banks with a presence in Gift City to get deeper into a game where there are a number of European banks as major players given their historical presence in this space as well as tax benefits in some of those jurisdictions.”
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Updated: 14 Jun 2023, 12:05 AM IST