Sebi bans Societe Generale from issuing new P-Notes

Cracking the whip on erring foreign institutional investors (FIIs),the Securities and Exchange Board of India (Sebi) has directed Societe Generale (SG) — one of the largest banking groups in France — not to issue,subscribe or otherwise transact in any new offshore derivative instrument (ODIs) or participatory notes (P-Notes) in India “till such time it provides a true and correct reporting of its ODI and P-Notes transactions” to the market regulator. In a order issued on Friday,Sebi said SG “has failed to provide true,fair and complete details of the ODIs/P-Notes activity undertaken by it and also prima facie violated the provisions of FII Regulations by furnishing false and incorrect information to Sebi”. “Societe Generale is required to show cause as to why appropriate proceedings including cancellation of its certificate of registration as a foreign institutional investor should not be initiated,” Sebi said. In December 2009,Sebi had barred Barclays Bank PLC from issuing and trading in offshore derivative instruments for furnishing false and incorrect information to Sebi. ODIs and P-Notes,famous for their opacity,are investment avenues used by overseas investors to park funds in Indian equities. According to Sebi,it is abundantly clear from the reporting stipulations on P-Notes that FIIs issuing the ODIs/P-Notes are required to provide the name of the investor in case the same (ODIs/P-Notes) are issued onward to any other entity as a back to back instrument. “The responsibility for identifying and the accountability for reporting the end beneficial owners rests entirely with the issuer,the FII,” Sebi said. On the contrary,from the submissions and the documents provided by SG,it appears that it had shirked its responsibility cast on it under the regulations,and has left it to its subscriber,Hythe,which is not registered and regulated by Sebi,to furnish the necessary information. Sebi has permitted issuance of ODIs/P-Notes by FIIs with an explicit obligation that the issuance of ODIs/P-Notes comes with an inalienable responsibility to maintain complete audit trail of onward issuances of ODIs/P-Notes right up to the end beneficiary. “FIIs should also bear the responsibility of reporting the same to Sebi in their monthly reports,” it said. “Sebi,vide e-mail dated January 7,2010,informed SG that the onus is on SG to abide by the provisions of the FII Regulations and stipulations thereof. Leaving the responsibility of making the disclosures on ODI issuances mandated under the said statutory obligations to its clients is certainly no compliance at all,” Sebi said. “While providing details of all the ODIs/P-Notes entered into with Hythe,SG stated and acknowledged that there had been errors in its reporting to Sebi of the transactions with Hythe. According to it,fourteen such transactions with Hythe were wrongly reported to Sebi. As per the monthly reports filed by SG with Sebi till date,it was seen that SG had 48 transactions with Hythe out of which it admitted having misreported in respect of fourteen of these transactions,” Sebi said. “It is evident that SG has failed to satisfy the basic tenet of ‘know your client’ compliance when it issued ODIs. SG was not only unaware of the end beneficial owner but also did not have any mechanism in place to ensure that it can know the end beneficial owner,” Sebi said.