HSBC plans to wind up P-notes business in India

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. According to sources, 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. “It is a part of HSBC’s global restructuring strategy to shut the business vertical, which doesn’t offer much growth potential. The bank has evaluated all the possible options on the table, including selling the P-note business.

The decision to shut operations is in the best interest of the bank,” said a banker. According to sources, the renegotiated DTAA with Mauritius has also impacted the P-notes business of HSBC, which is registered in Mauritius. 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.

Further, all the investments made prior to March 2017 would come under the “grandfathering” clause and would be exempt from paying any capital gains. The share of P-notes in the overall FPI assets has been coming down due to tightening of disclosure related norms. In 2007, P-notes accounted for nearly half of the FPI assets.