No plan to ban P-Notes

The government has ruled out imposing a ban on participatory notes, even as market regulator Securities and Exchange Board of India (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 notes,” a finance ministry source said.

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 per cent of total FIIs investment compared to 38.6 per cent in January, 2008. In absolute terms, Rs 1.10 lakh crore came through P-Notes against the total of Rs 3.30 lakh crore over the period.

Experts attributed this to 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 of India’s (RBI’s) does not favour these instruments and has sought ban on them.

The source said RBI’s objections did not hold much ground.

He said P-Notes were 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 were like equity indices such as BSE Sensex and S&P CNX Nifty, where the holder did 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.