FM Rules Out Ban On Participatory Notes

NEW DELHI: Finance minister P Chidambaram intervened decisively on Wednesday morning after the sensex and nifty hit the lower circuit in early trading. Mr Chidambaram ruled out a ban on participatory notes (PN) and said that SEBI’s move to impose some restrictions on investments through the PN route was aimed at moderating capital inflows.

Endorsing SEBI’s move to place curbs on PNs, he said the proposals were aimed at moderating capital inflows and were in the interest of investors across all categories.

“Yesterday's SEBI decision is part of the series of steps that have been taken to moderate capital inflows. We are not in favour of banning PNs. We have not banned PNs. We have simply placed a cap on the proportion of money coming through PN notes vis-a-vis the total assets under management and the derivative position,” Mr Chidambaram told media persons.

While inflows had an impact on the rupee, these inflows were also contributing towards a steep and sharp upward movement of the market. Mr Chidambaram’s intervention certainly appears to have worked. It brought in some semblance of normalcy into the market which lost over 1700 points in the opening session, tiggerring circuit breakers.

The BSE benchmark index which had crossed 19000 on Monday, closed down 336 points to 18,716.

The finance minister made it clear that the SEBI consultation paper, with or without some changes, will become a regulation from October 25. The SEBI board is meeting on October 25 to consider this proposal.

“The decisions that have been announced by SEBI are good decisions, good step in the long term interest of the investors, good for the capital markets. They are meant to moderate the capital inflows which were very copious and have an impact. The index has risen 1000 points in just four trading sessions. I want to assure all investors that what has been done was a necessary step and in the interest of everyone, retail, broker, high net-worth individual, institutional investors everyone,” Mr Chidambaram said.

PNs are derivative instruments issued against an underlying security (shares or derivatives). These are issued by foreign portfolio investors registered in India to overseas clients who may not be eligible to invest in the markets here. The holder of PNs gain from the capital appreciation in the underlying shares.

SEBI’s announcement is a part of a series of steps that have been taken to moderate the capital flows into India and the culmination of a long discussion between the market regulator, central bank and the government. The share of PNs as a percentage of total foreign portfolio flows rose from 32% late last year to 51.6% by August, 2007. The outstanding value of PNs with underlying as derivatives is 30% of the total outstanding (Rs 3,53,484 crore) at Rs 1,17,071 crore.

RBI has called for a ban on incremental or fresh issuance of participatory notes (PNs) to overseas investors by foreign institutional investors (FIIs) The RBI proposal is a fallout of the desperate battle that the monetary policy authorities are fighting in the face of unprecedented inflows. In the last week of September alone, RBI had mopped up $12 billion, with FIIs pumping in a net amount of over $5 billion in the last three weeks.

The inflows had major monetary policy consequences since RBI has to sterlise the rupees released as a result of buying up dollars. The move not just aims at controlling these inflows but inflows which were coming from unknown quarters, a source said. The idea is to encourage investors who come through PNs to invest directly.