'Allow overseas HNIs to invest directly in stocks'

Move aimed to discourage indirect ways of investment, such as participatory notes (PNs), in the capital market.

In order to discourage indirect ways of investment, such as participatory notes (PNs), in the capital market, the Economic Survey 2008-09 has recommended that overseas high networth individuals (HNIs) be allowed to register and invest directly through authorised domestic intermediaries.

Sources said that capital market regulator Securities and Exchange Board of India (Sebi) could consider this recommendation.

According to legal experts, this recommendation, if implemented, would not only help increase transparency in the market, but also limit the flow of unaccounted money. “The move will curb ambiguity, bring in more accountability and limit the misuse of PNs," said Kedar Dige, senior lawyer and partner of Mumbai-based VKD Associates, which advises a lot of foreign funds.

Some even felt that allowing HNIs to register and invest directly could create a new class of investors. “Currently, it is highly difficult for non-residential Indians (NRIs) to register as sub-accounts of foreign institutional investors (FIIs). Such a move will not only bring transparency, but also encourage more investments in the country,” said Akil Hirani, managing partner, Majumdar & Co.

In the last couple of years, PNs have been in the news for all the wrong reasons. PNs have been often criticised by experts as instruments that lack transparency as they make it difficult to know the actual investor.

In 2007, the then Sebi Chairman, M Damodaran, had banned PNs completely in derivatives and imposed a cap on the same in the cash segment. However, after the recession hit world economies, sending stock markets into a tailspin, current Sebi Chairman C B Bhave lifted the ban.

At present, there are 35 Sebi-registered FIIs in India, who issue PNs to investors in the overseas market. Market participants said over the past month, $3.5 billion (around Rs 16,500 crore) of foreign funds flowed into the Indian capital market. Out of this, a major chunk came through the PN route.