HSBC is planning to wind up participatory notes (P-notes) operations in India, as tightening of regulatory framework has made the business unviable. P-notes’ attractiveness has been on the wane following tightening of the regulations and the recent double tax avoidance agreement (DTAA) with Mauritius.

HSBC is among the top five issuers of P-notes, or offshore derivative instruments, in India with a market share of more than 6 per cent at the end of last financial year. the bank had set up an internal committee to study the developments around P-notes. The committee has suggested that incomes from P-note operations would decline in the next five years as the new norms have resulted in escalation of costs and regulatory burden.

he renegotiated DTAA with Mauritius has also impacted the P-notes business of HSBC, which is registered in Mauritius.

“Participatory notes are no longer the most attractive route for overseas funds. These days, P-note holders are opting for direct route as procedures for direct registrations have been simplified. Even in terms of disclosures, if these investors come to markets as category-I or category-II FPIs, they don’t have to disclose the end beneficiary while in case of P-notes they are required to disclose the same,” said Suresh Swamy, Partner, PwC.

Earlier this year, Sebi increased the Know Your Customer (KYC) requirements, issued curbs on transferability and prescribed more stringent reporting for P-notes issuers and holders. It also mandated issuers to follow domestic anti-money laundering laws (AML), instead of norms prevalent in the jurisdiction of the end beneficial owner.

As per the revised DTAA agreement, short-term capital gains would be charged on all the investments coming from Mauritius. The capital gains tax would be 15 per cent from April 2019. In order to facilitate smooth transition, government has proposed to tax the investments from Mauritius at 7.5 per cent until March 31, 2019.