Round Tripping and P-Note – UPSC GS3

What do you understand by Round-tripping? Examine the  relationship between P-Notes and Round-tripping. In recent past SEBI, Supreme Court and Government have initiated measures either to bring back black money or to curb its circulation. In this regard, discuss why addressing issues related to P-Notes and Round tripping is critical. (200 Words)

The term ‘Round Tripping’ is a process in which the money returns back to the same place from where it had originated. This is basically done to avoid paying taxes and escaping other legal essentialities.
P-notes are the offshore derivative instruments which are issued against the Indian securities by the foreign portfolio investors registered with SEBI. Thus, it is an easier way of investing in the securities of other countries without any registration with the regulator of that country.
P-notes are one of the instruments which assists in round tripping. This can be explained as: An Indian sending unaccounted money to tax havens through hawala transaction and the hawala operator in the tax haven investing that money into the P notes issued by an FPI registered with SEBI. In this way, unaccounted money can be converted into legitimate source of income.
The FM whitepaper talks about the role of P notes in money laundering. This helps in tax evasion and which ultimately leads to revenue loss for the Government. P-notes are basically ‘hot money’ which can be pulled in and out at any point of time increasing the volatility in the market. An ex-NSA of India even pointed out the link between P-notes and terrorist money. Terrorists can use these as instruments for their transactions as there is complete anonymity about the final receiver of P-notes or they can also use it as a tool of financial terrorism by increasing the volatility. P-notes are also often criticized for evasion of capital gains tax.
All the above arguments point out to the fact that either there should a mechanism to trace the final beneficiary of P notes or they should be gradually phased out by proper consultations with the intermediaries.




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