(a) whether the Reserve Bank of India (RBI) has been advocating
a ban on investment through ParticipatoryNotes (PN) in view of
the opaque nature of the instrument which makes it difficult to
assess the quality of funds;
(b) if so,reaction of the Government thereto;
(c) whether the Government has taken any decision to remove all
the earlier restrictions on investment through PN by foreign
investors;and
(d) if so, the details thereof?
MINISTER OF THE STATE IN THE MINISTRY OF FINANCE (SHRI PAWAN KUMAR BANSAL)
(a) and (b): Yes Sir.Reserve Bank of India is of the opinion that Overseas
Derivative Instruments (ODIs)/ Participatory Notes (PNs) should not be
permitted and accordingly it has suggested that no fresh issuance of PNs
be allowed. However, the Expert Group headed by Dr.Ashok Lahiri,constituted
by the Government of India,on “Encouraging FII Flows and Checking the
Vulnerability of Capital Markets to Speculative Flows†examined the issue
of PNs and recommended that the current dispensation for PNs may continue.
Government’s views are that PNs are market instruments that are created and
traded overseas.Hence,Indian regulators cannot ban or control the issue of
PNs;they can only be regulated, and they are indeed being regulated by SEBI.
(c) and (d): SEBI had imposed certain restrictions on Overseas Derivative
Instruments (ODIs) in October 25,2007 which were to be subsequently reviewed.
These restrictions were as follows:
1. FIIs and their sub-accounts not to issue/renew ODIs with underlying
as derivatives.The existing positions to be wound down over 18 months
2. Sub-accounts of FIIs not to issue any PNs/ ODIs.The
existing positions to be wound down over 18 months
3. The FIIs who were issuing ODIs with notional value of PNs outstanding
(excluding derivatives) as a percentage of their AUC in India of less than
40% shall be allowed to issue further ODIs only at the incremental rate of
5% of their AUC in India.
4. Those FIIs with notional value of PNs outstanding (excluding derivatives)
as a percentage of their AUC in India of more than 40% shall issue PNs only
against cancellation/ redemption/ closing out of the existing PNs of at least
equivalent amount.
These restrictions imposed were reviewed on 06,October 2008 and it was
decided to do away with the quantitative restrictions applicable on the
ODI positions that the FIIs could take with respect to their assets held
in Indian securities. Further it was also decided to do away with the
restriction imposed on the ODI issuances on derivatives. However,the
requirement to issue ODIs to only regulated entities subject to KYC
norms continues as before.