SEBI READIES P-NOTE FRAMEWORK FOR GIFT CITY

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Market regulator Sebi is readying a framework for issuance of participatory notes (p-notes) from international financial services centres such as GIFT City. It is in talks with FPIs, which act as issuers of p-notes, sources said. The move comes at a time when Indian bourses have terminated licensing of indices and data-feed agreements with their foreign counterparts. This will force overseas investors to either invest directly or come through GIFT City to trade in Indian securities.

The Securities and Exchange Board of India (Sebi) is readying a framework for issuance of participatory notes (p-notes) from the international financial services centres (IFSCs) such as GIFT City. P-notes are derivative instruments that allow overseas investors to invest in a domestic security without having to directly register with Sebi. The market regulator is in talks with foreign portfolio investors (FPIs), which act as issuers of P-notes, according to sources.

The move comes at a time when Indian bourses, including the National Stock Exchange (NSE), have terminated licensing of indices and data-feed agreements with their foreign counterparts.

The snapping of ties will force overseas investors, which use platforms like the Singapore Exchange (SGX) to trade in Indian securities, to either invest directly or come through GIFT City.

GIFT City is designed like an offshore trading platform with low transaction cost. Know-your-customer (KYC) documentation for p-notes issued from the IFSC would have to adhere to anti-money laundering laws, sources privy to the development said. The regulator, however, is expected to do away with strict trading restrictions on these instruments.

At present, no p-note subscriber is allowed to take a derivatives position in

■ Sebi to soon come up with a framework for issuance of p-notes from IFSC, Gujarat

■ The KYC documentation for p-notes from IFSC is likely to be on parwith p-notes issued by on-shore FPIs

■ However, Sebi is expected to relax the trading restrictions on p-notes issued from IFSC

■ On-shore subscribers of pnotes are not allowed to take any position in the Indian derivatives market

■ Indian stock exchanges recently terminated

the market for any other purpose apart from hedging. Also, there are restrictions on transfer of p-notes from one investor to another. According to experts, since the IFSC is a typical offshore destination where only derivatives are traded, Sebi is open to a less-stringent licensing of indices and data-feed agreements with foreign bourses

■ FPIs looking to invest in India can either invest directly or through the IFSC GIFT City, which offers tax benefits and liabilities

“Sebi recently conducted a meeting with some of the big FPIs that had sought the regulator’s permission to issue p-notes from the IFSC. The idea was to provide an entry to those investors who had lost trading opportunity due to the closing of offshore derivatives trading platforms like the SGX,” said another source privy to the development.

There was still a huge appetite among global funds for instruments such as p-notes because these did not amount to direct exposure, experts said. Despite the high KYC requirement, pnotes are still handy for investors that do not want to have a direct exposure to the Indian market due to restrictive laws in their own countries. P-notes also offer a cost advantage for funds that invest a marginal amount of their portfolio in Indian securities.

“The initial rules for p-note issuance from the IFSC could be much simpler with fewer restrictions on issuers since the whole concept was at an evolutionary stage. Once the instruments gain traction, the regulators concerned could consider tightening rules further,” said Tejesh Chitlangi, partner, IC Legal Universal.

The share of p-notes in total FPI investment has gone down significantly in the last decade with Indian regulators cracking down on their misuse. A decade ago, p-notes accounted for half of total FPI inflows. Now they just account for just 3.7 per cent.

Sebi in 2016 tightened KYC norms for p-notes. P-note issuers were asked to follow Indian anti-money laundering rules. Sebi also made it mandatory for FPIs to disclose the end beneficiary of Pnote subscribers.

Source: Press Reader

Bitcoin risks: Government warns against cryptocurrency, says don’t get trapped

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Weeks after the Reserve Bank of India issued its third warning against the crypto currency trading, the Finance Ministry today said that virtual currencies are not legal tender and such currencies have no protection. It said the virtual currencies (VCs) including Bitcoin don’t have any intrinsic value and are not backed by any kind of assets. “The price of Bitcoin and other VCs therefore is entirely a matter of mere speculation resulting in spurt and volatility in their prices,” the Ministry said in a statement.

The Ministry also said that there was a real and heightened risk of investment bubble of the type seen in ponzi schemes which can result in sudden and prolonged crash exposing investors, especially retail consumers losing their hard-earned money. “Consumers need to be alert and extremely cautious as to avoid getting trapped in such Ponzi schemes,” the statement said.

The Ministry also explained the vulnerabilities in investing in digital currencies. It said the virtual currencies are stored in digital/electronic format, making them vulnerable to hacking, loss of password, malware attack which may also result in permanent loss of money. “As transactions of VCs are encrypted they are also likely being used to carry out illegal and subversive activities, such as, terror-funding, smuggling, drug trafficking and other money-laundering Acts,” the Ministry said.

The Finance Ministry today reiterated that the government or the RBI has not authorised any Virtual Currencies as a medium of exchange. It also made it clear that the government or any other regulator in India has not given license to any agency for working as exchange. It said: “Virtual currencies are not backed by government fiat. These are also not legal tender. Hence, VCs are not currencies. These are also being described as ‘Coins’. There is however no physical attribute to these coins. Therefore, VC are neither currencies nor coins.”

This may be the first official warning from the government, the Central Bank on three different occasion cautioned the users, holders and traders about the potential financial, operational, legal, customer protection and security related risks that they were exposing themselves to by investing in Virtual Currency including Bitcoin. Earlier this month, the RBI clarified that it has not given any licence/ authorization to any entity/ company to operate or deal with Bitcoin or any virtual currency.

Today, the government also made it clear that VCs are not legal tender and such VCs do not have any regulatory permission or protection in India. The investors and other participants therefore deal with such currency entirely at their risk.

The Indian government and RBI are not the only ones to caution investors against crypto currency. Leading financial analysts and economist have also raised red flag against it. Business magnet Warren Buffett called it a ‘real bubble’. Garrick Hileman, a research fellow at the University of Cambridge’s Judge Business School, earlier said: “What’s happening right now has nothing to do with Bitcoin’s functionality as a currency – this is pure mania that’s taken hold.”

Source: Business Today

Here’s why India has decided to crank up its crackdown against Bitcoins

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I-T department issues notices to 4 lakh high networth individuals across the country who were trading in bitcoins on exchanges

Here’s why India has decided to crank up its crackdown against Bitcoins

The rising craze for bitcoin, a cryptocurrency that has rocketed to shocking highs, has come under the government’s lens. Bitcoin can be an easy way to evade tax or snare unsuspecting small investors in ponzi schemes. The government has begun a crackdown on illegal uses of this unregulated virtual currency.

Widening its probe into bitcoin investments and trade, the Income Tax (IT) department is set to issue notices to 4 to 5 lakh high networth individuals (HNI) across the country who were trading on the exchanges of this unregulated virtual currency, the PTI reported.

The move comes after the IT department conducted survey operations last week at major bitcoin exchanges across the country on suspicion of alleged tax evasion. These operations were undertaken for gathering evidence for establishing the identity of investors and traders, the transaction undertaken by them, identity of counter-parties and related bank accounts.Earlier this month, there was a spurt in the value of bitcoin. It rose from under $10,000 at the start of the year to close to $20,000, before a sharp 20 per cent plunge within hours.

In addition to financial risks—the value of bitcoins has seen huge falls within hours—the regulators are worried about their use for illicit and illegal activities, subjecting the users to an unintentional breach of laws against money laundering and terror finance.Concerns also emanate from some unscrupulous entities indulging in illicit money-pooling activities—commonly known as ponzi schemes—with the promise of huge returns from investment in bitcoins and other variants, which they claim are minted through blockchain, a distributed ledger technology that was created to mint bitcoins and comprises of extremely complex algorithms with several thousand nodes for each chain.

There is a suspicion that some so-called cryptocurrencies and bitcoin investments may actually have nothing to do with any blockchain-developed virtual currency and are just new ways devised by scamsters to ride the wave and what they may be offering could be ‘e-ponzi’ schemes.

The financial regulators are worried that a complete lack of regulatory regime for such cryptocurrencies may give rise to ‘e-ponzi’ schemes.

The financial sector watchdogs, including RBI and Sebi, as also various government agencies, will soon get into a huddle to prepare a framework to safeguard the gullible investors and to clamp down on the fraudsters who may try to manipulate the regulatory gaps, PTI reported, quoting a senior official.

There are quite a few proposals on the table and those include applying to cryptocurrencies the existing regulations aimed at checking the spread of ponzi schemes or illicit money-pooling activities, money laundering and black money generation and circulation, another official said.

The jury is still out on whether such virtual currencies should be allowed as legal payment tender or investments, though there are also suggestions from some quarters for allowing them with necessary checks and balances.

200,000 more directors disqualified for holding posts in defaulting companies

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The govt has struck off more than 200,000 firms that have not complied with the provision of the law from the list maintained by the RoC and frozen their bank accounts to check any siphoning off of funds.

The corporate affairs ministry has disqualified another 200,000 directors for holding posts in defaulting companies that have not filed their financial returns for the last three years or more, taking the total number to over 300,000, while cancelling the registration of another 10,000 companies.

These directors won’t be able to hold board seats in other companies as well and may have to resign soon from them, potentially impacting other firms as well.

While the current law does not provide for any appeal, the government is thinking of exercising “the review power to take any such plea into consideration,” PP Chaudhary, minister of state for corporate affairs, told ET. “By operation of law, these directors are disqualified but we have to see under what provision of law we can examine this. If we need to frame a rule we will do it.”

According to Section 167 of the Companies Act, a director is disqualified automatically from all other posts of director once barred under Section 164, said Chaudhary, a lawyer by profession.

200,000 more directors disqualified for holding posts in defaulting companies

The government has struck off more than 200,000 firms that have not complied with the provision of the law from the list maintained by the Registrar of Companies and frozen their bank accounts to check any siphoning off of funds.

“This exercise is part of demonetisation. No one had the guts to stop all this till now. It will prove a catalyst for the Indian economy,” said the minister of state, who took over this responsibility after the recent reshuffle. He said the money trail will be traced after data mining of these companies.

 

The government will prioritise those cases where there is evidence of a large movement of cash. He rejected the criticism that the action was retrospective in nature.

“Law has not been retrospective. Companies had two years to file returns… there was healing time,” the minister of state said. So far the shell firm chase has been limited to defaulting firms that have not filed their financial returns for the last three years or more but the government will soon go after compliant firms as well to check their holding companies structures and fund flows.

Chaudhary said the intent is to restore trust in the corporate structure and also improve ease of doing business in the country.

“We do not want to create any terror. Trust in the corporate structure is gone and we want to increase the investor confidence, not interfere in the corporate structure,” Chaudhary said.The government wants to promote ease of doing business to ensure investors that their money is safe in India, he added.

“This exercise has been triggered due to governance. We have shown scale and speed in an unparalleled way in the way we have acted against these companies and directors,” Chaudhary said.

Last week, the government made public the names of 55,000 directors who were disqualified under Section 164 (2) (A) of the Companies Act. The list included the names of prominent politicians including former Jammu and Kashmir chief minister Omar Abdullah and Malayalam filmstar Mohanlal among others.While the government will not impose any penalty on the directors of government-owned companies that figured in the list of defaulters, those in private firms will have to resign from other board seats and won’t be eligible for reappointment for up to five years.

The corporate affairs ministry will also look into these companies to identify shell companies to see if they have been used for money laundering or any other illegal activity. “We need to find who the shell company’s real beneficiary is… It could be in the name of the cook or a driver. We are taking stock of the money in these companies pre and post demonetisation,” Chaudhary said.

While spotting defaulting companies is an ongoing process, Chaudhary said that, using artificial intelligence, the government will sift out the shell companies from among those that are compliant with regulations and also create an early warning system. “The system will trigger alerts every time we see unusual activity taking place in a company. It will also help us find out the beneficial owner of the shell companies,” he said.

SEBI set to block P-Note route for NRIs to prevent laundering of black money

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The regulator wants to tighten the rules amid concerns that various variants of P-Notes have been floated since the implementation of GAAR on April 1.

The regulator plans to put in place a clear bar on non-resident Indians (NRIs) and entities owned by them and resident Indians subscribing to participatory notes, a move aimed at preventing possible round-tripping or laundering of black money.

The Securities and Exchange Board of India (SEBI) is set to tweak its regulations to this effect at its upcoming board meeting on April 26 after the finance ministry recently wrote to the regulator. Such a restriction is already implied through the answer to a frequently asked question (FAQ) but the regulator feels this lacks legal sanctity.

“Most of Sebi’s FAQs themselves clearly state that they should not be regarded as interpretation of law, and that they should not be treated as a binding opinion or guidance from SEBI,” said Moin Ladha, associate partner, Khaitan & Co. “Therefore, in case of any contradictions between the regulations and FAQs, the regulations would prevail. While FAQs do indicate the position SEBI is taking, they cannot be said to override or expand the scope of the regulations.”

P-notes are a derivative instruments issued offshore to those who want to bet on the country’s stocks and bonds without registering themselves with SEBI. The regulator wants to tighten the rules amid concerns that various variants of P-notes have been floated since the implementation of General Anti Avoidance Rules (GAAR) on April 1.

Investments via P-notes had declined to a 43-month low of Rs 1.57 lakh crore in December but rebounded in January to Rs 1.75 lakh crore before dropping again to Rs 1.70 lakh crore in February. There could be a resurgence in P-note issuance as these are exempted from capital gains tax under the amended tax treaties with Singapore and Mauritius that took effect on April 1.

Legal experts said the concept of NRI itself is a grey area and defining it would be crucial for regulators. They said the prohibition should be strictly enforced to prevent round-tripping of Indian money. “The concern of round-tripping of Indian money, particularly when leading industrialists may have a foreign passport, was always a concern,” said Sandeep Parekh, founder, Finsec Law Advisors. SEBI relies on the income tax definition on what constitutes an NRI.

“The concept of who is an NRI itself is a grey zone ranging from income tax definition which is based on residency to citizenship laws which are typically drafted very broadly to include any person of Indian origin and their kith and kin who are born abroad,” Parekh said. “Defining an NRI within this spectrum would be crucial to allow legitimate money in from immigrants who have left India several generations ago and are doing exceedingly well.”

In recent discussions with a leading custodian, the latter gathered the impression that the regulator was not comfortable with NRIs as a group holding a majority interest in a Category II foreign portfolio investors (FPIs) even though regulations do not restrict this. Rules require Category II FPIs to be broad-based — the minimum number of investors should be 20 and no single investor can hold more than 49%. However, NRIs as a group cannot hold more than 49% in Category III FPIs.

Source :  http://timesofindia.indiatimes.com/business/india-business/sebi-set-to-block-p-note-route-for-nris-to-prevent-laundering-of-black-money/articleshow/58215743.cms

U.S. issues rule requiring banks to identify shell company owners

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A company list showing the Mossack Fonseca law firm is pictured on a sign at the Arango Orillac Building in Panama City in this April 3, 2016 file photo. REUTERS/Carlos Jasso/Files

The Obama administration is issuing a long-delayed rule requiring the financial industry to identify the real owners of companies and proposing a bill that would require companies to report the identities of their owners to the federal government, U.S. officials said on Thursday.

The Customer Due Diligence (CDD) rule, in the works since 2012, and the proposed legislation are meant to hinder criminals from using shell companies to hide ownership and launder money, finance terror, and commit other threats to the global financial system.

The use of shell companies to hide assets and avoid taxes is in the spotlight following a massive leak of data from the Panama-based law firm Mossack Fonseca, which embarrassed several world leaders and sparked government investigations around the globe into possible financial wrongdoing by the wealthy elite. The International Consortium of Investigative Journalists said it will release a searchable database of more than 200,000 offshore entities next week.

“Fundamentally our financial system should not provide the rich, the powerful, and the corrupt with the opportunity to shield their assets,” said Wally Adeyemo, the U.S. deputy national security advisor for international economics, in a call with reporters on Thursday. “Nobody should be able to hide in the shadows from their legal obligations.”

The final CDD rule will require banks, brokers, mutual funds and other financial institutions to collect and verify the identities of the real people, or “beneficial owners,” who own and control companies when those companies open accounts.

Financial institutions will have to verify the identity of any person or company who owns more than 25 percent of the company, and one live person who controls the company even if that person owns less than 25 percent.

Banks will have two years to get their systems into compliance, said Jennifer Fowler, the U.S. Treasury deputy assistant secretary for terrorist financing.

The U.S. Treasury said in 2012 it planned to propose a rule that would clarify and standardize financial institutions’ obligations to know the identities of their customers.

But the proposal generated opposition from the financial industry, which argued it would be costly, ineffective, and difficult to implement because the United States lacks a national database of corporate information.

To address one of those industry concerns, Treasury will propose legislation requiring companies to report to the Treasury the identity of beneficial owners when a company is incorporated. The legislation would create a central registry of beneficial ownership, something the U.S. currently does not have, Fowler said.

U.S. secretaries of state have lobbied against similar legislative action in the past, arguing that the Internal Revenue Service already has corporate ownership records that it could make available to law enforcement.

Adeyemo said the Obama administration had been “consulting actively” with secretaries of state. “This is a place where we need Congress to act,” he said.

Taken together, the measures would make the financial system more transparent and close loopholes that allow for abuse or illegal activity, officials said.

More than 1,000 prosecutions are brought each year in the United States for money laundering, Fowler said. “This is a record that no one in the world can match.”

But, she added, “there are vulnerabilities that we need to address in order to maintain an effective regime.”

The Treasury is also proposing a regulation that would increase requirements for some foreign-owned companies operating in the United States to report information to the government, which officials said would prevent the use of those companies for tax avoidance purposes.

In addition, the Justice Department is proposing amendments that would strengthen its ability to pursue foreign corruption cases, including issuing subpoenas for records in money laundering investigations, obtaining overseas records, and using classified information in civil cases.

Source: http://www.reuters.com/article/us-usa-regulations-finance-idUSKCN0XX02O