e  rit    ar et in ndia    14.19
           PNs are thus issued, to provide access to a set      (v) In order to monitor the investment
     of foreign investors who intend to reduce their                 through these instruments, SEBI on 31
     overall costs and the time involved in making                   October, 2001, advised FIIs to submit
     investments in India. In other words, the attraction            information regarding issuance of
     of investing in PNs is primarily one of efficiency              derivative instruments by them, on a
     (from an infrastructure and time perspective) for               monthly basis. These reports require the
     which they are willing to forego certain benefits of            communication of details such as name
     directly holding the local securities (for example,             and constitution of the subscribers to
     title and voting rights), whilst also assuming other            PNs, their location, nature of Indian
     risks.                                                          underlying securities, etc.
                                                               (vi) FIIs cannot issue PNs to non-resident
     regulAtion of Pns                                               Indians (NRIs) and those issuing PNs
     PNs are market instruments that are created and                 are required to give an undertaking to the
     traded overseas. Hence, Indian regulators cannot                effect.
     ban the issue of PNs. However, they can regulated,       (vii) SEBI has also mandated that QFIs
     as SEBI does—when a PN is traded on an overseas                 (qualified foreign investors), the recently
     exchange, the regulator in that jurisdiction would              allowed foreign investor class, shall not
     be the authority to regulate that trade. PNs have               issue PNs.
     been used by FIIs, since FIIs were permitted to             SEBI in consultation with the government
     invest in the securities market (1994)—they were      had decided in October 2007, to place certain
     not specifically dealt with under the regulations     restrictions on the issue of PNs by FIIs and their
     until 2003. According to the SEBI Regulation,         sub-accounts. This decision was taken with a view
     2004 (and further amended in 2008) with the           to moderate the surge in foreign capital inflows into
     objective of tightening regulations in this regard—   the country and to address the ‘know-your-client’
                                                           concerns for PN holders. However, it was found
           (i) PNs can be issued only to those entities
                                                           that such restrictions were ineffective. Therefore,
               which are regulated by the relevant
                                                           SEBI in October 2008 reviewed its earlier decision
               regulatory authority in countries of
                                                           and decided to remove these restrictions in the
               their incorporation and are subject to
                                                           light of the above factors. Rather, more attention
               compliance of ‘know your client’ (KYC)
                                                           is given to effective disclosures. As per a SEBI
               norms.
                                                           decision of October 2013, the Category III FIIs
          (ii) Down-stream issuance or transfer of the     are not allowed to issue PNs.
               instruments can also be made only to a
               regulated entity.                           the concerns relAteD to Pns
         (iii) Further, the FIIs who issue PNs against     Being derivative instruments and freely tradable,
               underlying Indian securities are required   PNs can be easily transferred, creating multiple
               to report the issued and outstanding PNs    layers, thereby obfuscating the real beneficial
               to SEBI in a prescribed format.             owner. It is in this respect that concerns about
         (iv) In addition, SEBI can call for any           the identity of ultimate beneficial owner and the
               information from FIIs concerning off-       source of funds arises.
               shore derivative instruments (ODIs)               For the reason that such instruments are
               issued by it.                               issued outside of India, these transactions are