Clearing the air on P-Notes, Revenue Secretary Shaktikanta Das said the government has no intention of banning these financial instruments overnight and it is examining how to improve the disclosures, said the media reports.
The comments assume significance as a Supreme Court appointed Special Investigation Team (SIT) on black money has asked capital market regulator Sebi to review its regulations on participatory notes and identify their end-users.
"It's nobody's intention to ban P-Notes overnight. The SIT report highlights that there is a need for further improvement in P-Notes regulations," Das said.
SIT raised its concerns about possible manipulation of the popular offshore instrument for the purpose of money laundering.
"We are in the process of consultations with the Reserve Bank of India (RBI) and Sebi on the SIT recommendations on P-Notes," the Secretary said, adding that the government will also speak to FIIs before firming up its view.
Additionally, the government will examine how to improve the Know Your Client (KYC) requirement for P-Notes, the Revenue Secretary said.
Last month, Finance Minister Arun Jaitley had said the government is mindful of the impact on foreign investment in case of any action against P-Notes.
Stock markets had fallen after SIT asked Sebi to put in place regulations to help identify individuals holding such participatory notes and take necessary steps to check black money and tax evasion through the stock market route.
Back in 2007, a recommendation similar to SIT's had triggered a market collapse, prompting the then finance minister P Chidambaram to assure investors that no such measures were in the offing.
"The government will have interactions with financial institutions, FIIs and other stakeholders. A carefully-considered decision will be taken," Das said.
P-Notes are issued by foreign portfolio investors registered with Sebi to other overseas investors who want to take a position in the Indian markets without any direct registration for trading in Indian markets. These instruments are popular as they provide a low-cost and easier route for investing in the Indian markets.
However, Sebi has put in place strong checks and balances to avoid misuse of this route, and P-Notes can be issued only after strong KYC requirements are followed and they can not be issued to high-risk investors.
In May, investments through P-Notes hit a seven-year high of Rs 2.85 lakh crore. It stood at Rs 2.75 lakh crore at the end of June.
The offshore derivative instrument accounts for nearly 15-20 per cent of the total FII investment in India since 2009.
Its share has fallen over the years after Sebi tightened disclosure norms and other related regulations.
It was as high as over 50 per cent at the peak of stock market bull run in 2007.