New Delhi, October 18: The government has ruled out imposing ban on participatory notes, even as market regulator SEBI is trying to bring more transparency in stock markets by encouraging foreign investors to directly register with it.
Participatory-notes (P-Notes) are the instruments issued by foreign institutional investors (FIIs), through which unregistered overseas investors invest in Indian stocks.
“There is no plan to ban participatory botes,” a Finance Ministry source told reporters.
He said there are similar instruments in other spheres of stock markets in India and they cannot be banned without any solid ground.
Foreign investors have reduced their use of P-Notes, despite surge in the equity markets.
In August 2009, P-Notes contributed to 15.5 percent of total FIIs investment compared to 38.6 percent in January, 2008. In absolute terms, Rs 1.10 lakh crore came through P-Notes against Rs 3.30 lakh crore over the period.
Experts attributed this to market regulator SEBI’s decision to encourage foreign investors to register directly with it to bring more transparency on this front.
Since the information on ultimate beneficiaries of P-Notes is sometimes not known because of multi-layering, the Reserve Bank does not favour these instruments and has sought ban on them.
The source said RBI’s objections do not hold much ground.
He said P-Notes are just participation in the economic gains of a holding without owning it and there are similar instruments used in other spheres of stock markets in India.
Unregistered foreign investors invest in Indian stocks through P-Notes, making gains or losses as the value of these stocks change, but did not own these stocks.
He said these notes are like equity indices such as BSE Sensex and S&P CNX Nifty, where the holder does not own the indices but gains or losses with change in value.
The usage of P-Notes have come down despite SEBI lifting curbs imposed on P-Notes as there was less capital inflow into the country and sources of funds dried up due to global financial meltdown.
Faced with abundant capital flows into the country that led to sharp appreciation in rupee and hit exports, SEBI, in 2007, prohibited FIIs and their agents from issuing any fresh P-Notes in derivative markets.
Besides, they were required to wind up the current position over the next 18 months. Curbs were also imposed on P-Notes in spot markets.
All these controls were lifted last year.
–Agencies