Indian regulator halts Barclays’ p-note issuance

The Securities and Exchange Board of India (SEBI), India’s securities regulator, has banned UK-based Barclays Bank from issuing participatory notes after it was found to violate client identity disclosure requirements.
By None

The Securities and Exchange Board of India (SEBI), India’s securities regulator, has banned UK-based Barclays Bank from issuing participatory notes after it was found to violate client identity disclosure requirements.

Participatory notes – also known as p-notes – allow foreign firms to invest in Indian stocks without having to register with SEBI, which can be a burdensome process for companies looking to gain exposure to India.

P-notes can only be issued by foreign institutional investors (FIIs) that have been given special dispensation to do so by SEBI, on the condition that the FII reveals the identity of end-clients to the regulator.

According to an order issued by SEBI, Barclays wrongly disclosed the underlying client of p-notes issued in 2006 in Indian telecoms company Reliance Communications as Swiss bank UBS, before later changing it to UK-based firm Hythe Securities. Furthermore, it was found that Hythe Securities passed the p-notes to another firm, Pluri, a further contravention of SEBI rules.

As a result, Barclays cannot deal in Indian offshore derivatives until SEBI is satisfied that it has the correct mechanisms in place for accurately reporting p-note transactions. Barclays will be required to obtain certification from an auditor that it has the necessary mechanisms.

“SEBI places almost absolute faith and unqualified reliance on the ability of an FII to carry out the basic regulatory and prudential oversight,” read the SEBI order. “Once this faith is violated and the integrity of the process vitiated, then FII inflows can potentially become conduits for large-scale manipulation and fraud in the market.”

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