The Special Investigation Team (SIT) constituted for unearthing black money is uneasy over the rather opaque instrument of Participatory Notes (PN) as the foreign investors therein hide behind the SEBI registered Foreign Portfolio Investors (FPI).
There has been a lurking suspicion that PNs have lent themselves admirably to round-tripping -- Indian black money stashed away abroad coming back into India in the form of PNs into the Indian bourses. In other words, round tripping is a species of money laundering resorted to by industrialists, politicians and bureaucrats among others with black money and hence the SIT’s concern is genuine.
For industrialists, there is a double advantage -- not only is the black money brought back but also used to prop up the shares of the group companies. However PN also has genuine uses. For example, not all foreigners can take the trouble of complying with the SEBI drill on registration and regulation of FPI. For them the only option is to ride piggyback on FPIs already borne on the SEBI register. Be that as it may.
In 2015, the SIT flagged off PN when it found that Camay Island, a notorious tax haven with a population of about just 55,000, accounted for about 31.3% of overseas investments through offshore derivative instruments in the Indian bourses translating into an absolute investment of over Rs 85,000 crore. It smelt something fishy because it is just not possible for such a small population to invest such a massive amount.
Naturally, it gave rise to the presumption that Camay Island was being used by Indians for round-tripping. At SIT’s behest, the SEBI carried out reforms in the PN regime by prescribing greater disclosure of the names of beneficiaries, limit on transferability etc. And the initiative has indeed paid off with PN now accounting for just 8.4 percent of the total FPI exposure in the Indian bourses from the heady 50 percent in 2007. In absolute terms, the present PN amount in Indian bourses is Rs 2.1 lakh crore.
If despite the dwindling PN investments the SIT is still wary of it, there must be something bothering it. It suspects round-tripping is still on and may be wily people are getting round it through stratagems hitherto unknown like brazening it out and persuading FPIs not to expose them. That is why it wants to examine all the data to be provided by the SEBI with a fine tooth comb. It is also possible the SIT may like to focus equally on the new kid in the block -- Panama -- and find out whether people are taking advantage of the anonymity conferred by the Panama law on investments.
In other words the suspicion could be round-trippers could have found comfort in Panama where names simply do not matter. Are FPIs guilty of giving quarters to such opaque investments from Panama? This could be the angle that the SIT wants to pursue.
SIT must be commended for doing a thorough job. It could have easily turned its attention away from PN on the smug ground that its influence in any case is dwindling. But the SIT apparently wants to mine into the SEBI data to follow up on the trail provided by the investments made in the Indian bourses. Those caught may cry witch-hunt at the behest of the incumbent government but the fact is the SIT reports to the Supreme Court.