Societe Generale barred from issuing P-Notes

Stock market regulator, the Securities and Exchange Board of India issued a show-cause notice to foreign institutional investor Societe Generale (SocGen) and barred it from issuing new participatory notes (PNs). The move came as Sebi alleged that SocGen violated the rules relating to the issue of participatory notes.

Sebi has given 30 days to the investor to file a response to the show-cause notice. The company has to explain, why appropriate proceedings, including cancellation of its certificate of registration as an FII, should not be initiated against it. Barclays Bank had earlier faced a notice for similar violations from Sebi.

The similarity between both the cases is that PNs were issued to Hythe Securities and then, onward issued to Pluri Emerging and it had Reliance Communications stock as the underlying. In another case, Pluri Emerging had received money fraudulently taken out from the accounts of ADAG in UBS.

In an earlier report overdrafts had been illegally drawn against these ADAG accounts to channel funds through accounts of various diamond merchants. The funds were finally directed at the Indian Capital markets.  

In the case of SocGen the Sebi order stated, “It is evident that SocGen has failed to satisfy the basic tenet of ‘know your client’ compliance when it issued ODIs. SocGen 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 the ban will be in place until the regulator is satisfied with documents provided and till it seas an organizational resolve on the part of the investor.

The company admitted that there was a mistake in 14 of the 48 transactions it had done with Hythe Securities. Sebi did not specify the violations. SocGen had indicated that Hythe Securities was the end beneficiary of the PNs but could not give enough documents as Hythe was not willing to share the information with it. Hythe said that it would directly disclose the information required to the regulator.

The documents from Hythe received by Sebi however showed that the PNs were onward issued to Opportunite SA and then to Pluri Emerging. Sebi guidelines state that the issuer of the PNs must report the name of the investor. If the PNs are issue onwards even then the responsibility lies with the issuer to report the end beneficial owners.

Reserve bank of India (RBI) had once asked for banning the PNs all together getting sharp reply from the foreign investors as the stock market almost crashed. The finance ministry then decided to take the process slowly. Sebi has issues strict guidelines regarding PNs in 2008. A large chunk of FII on the stock market is channeled though PNs.