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No knee-jerk reaction on P-Notes curbs: Jaitley to investors

The comments came as stock markets slumped over 580 points and rupee slid to 64.15 to a dollar as investors saw any government action against P-notes as hurting genuine foreign investments.

New Delhi: Seeking to soothe jittery investors, government on Monday said it will not react in a "knee- jerk" manner to SIT recommendation on checking inflow of overseas investments via P-Notes, assuring that no action will be taken which adversely impacts the investment climate.

Finance Minister Arun Jaitley said a considered view will be taken on the Supreme-Court appointed Special Investigation Team (SIT) recommending stronger measures to identify owners of Participatory Notes (P-Notes) to check black money.

The comments came as stock markets slumped over 580 points and rupee slid to 64.15 to a dollar as investors saw any government action against P-notes as hurting genuine foreign investments.

"It is too early to say what view the government would take. But it will certainly not take any such action in a knee-jerk reaction, particularly one which has any adverse impact on investment environment," Jaitley told reporters in his Parliament House Office.

Separately, Revenue Secretary Shaktikanta Das said there is no need to "panic" and the Finance Ministry will take a view on the SIT suggestions only after consultations with Sebi, RBI and other institutions.

"At the moment there is no need to panic. We will take views after consultation with stakeholders including Sebi, RBI and related institution... There is no need for markets to react in any particular manner," he said.

The SIT had last week suggested to Sebi to put in place regulations that will help identify individuals holding P-Notes or offshore derivative instruments (ODIs), and take other steps required to curb black money and tax evasion through the stock market route.

P-Notes are used by a large number of foreign investors to park funds in the equity market without disclosing their identity to the market regulator Sebi.

The BSE Sensex later closed down 551 points or 1.96 percent at 27,561.38.

A similar recommendation in 2007 had triggered a major collapse in the stock market, prompting the then Finance Minister P Chidambaram to announce that no such measures would be taken by the government.

Jaitley said the recommendations made by the SIT on black money will come up to the government which "will apply its mind in due course keeping in mind the investment environment of the country as also the objective behind the SIT recommendations and then take a final view on the matter."

Till a few years ago, P-Notes used to account for more than 50 percent of total FII investment, but their share has fallen over the years after Sebi tightened disclosure norms and other related regulations.

Investments through P-Notes into India's capital market had touched a 7-year high of Rs 2.85 lakh crore in May. It was Rs 2.75 lakh crore at the end of June.

P-Notes make up mostly 15-20 percent of the total FII investment in India since 2009. While it used to be much higher - 25-40 percent - in 2008. It was as high as over 50 percent at the peak of stock market bull run in 2007.

The Revenue Secretary too sought to calm the jittery markets, saying there should be no uncertainty in market as presently status quo prevails.

"There is no reason for the market to react adversely.... There will be due stakeholder consultation and after that the government will take a decision. So there is no reason at this point in time to pre-judge which way the government is going to decide. There is no reason for the market to react adversely," Das said.

P-Notes, mostly used by overseas HNIs (High Net Worth Individuals), hedge funds and other foreign institutions, allow such investors to invest in Indian markets through registered Foreign Institutional Investors (FIIs).

This saves time and cost for them, but on the flip side the route can also be used for round-tripping of black money.

Das said that over the years tax havens have posed a challenge to the authorities and the revenue department is identifying possible sources of black money generation and taking necessary actions.

He said India has recently signed FATCA with the US, besides entered into multi-lateral agreements on automatic exchange of information and double taxation avoidance agreements.

Minister of State for Finance Jayant Sinha said the market should not over-react to P-Notes issue and there was no need for investors to panic.

The government will take into account all inputs and views of stakeholders before finalising its views on the issue, he said.

"I don't think markets should over-react. There is no need to panic for investors," he said, adding that the government is committed to providing a "stable, predictable, best in class regulatory and policy regime."

Stating that fear of illicit flow of hot money is a global phenomenon, Sinha said the government wants that nothing spooks investor sentiments.