RBI suggests restrictions on P-notes
Maintaining its stance on participatory notes (P-notes), the Reserve Bank of India (RBI)
has sent in a note to the finance ministry on the eve of the Securities and Exchange Board of India’s (Sebi’s) board meeting to decide on restrictions for P-notes. The central bank has suggested a complete ban on P-notes.
If that is not possible immediately, RBI has suggested two key conditions
for issuance of P-notes by FIIs. The RBI nominee on the Sebi board is expected
to broach the topic and talk about stringent conditions, the RBI thinks
should apply for participatory notes (P-notes) issued even by registered
foreign institutional investors (FIIs). The first is putting a limit to
PN-routed investments in sensitive sectors such as real
estate india and financial
services. The second is making a lock-in period mandatory for liquidating
investments made under P-notes.
The lock-in period could contain speculative behaviour and the recommendation
is based on the second report of the Tarapore committee on capital account
convertibility, according to sources. One of the possibilities being
considered is the capping of P-note investments in sectors which have an
upper limit on foreign investment — both foreign direct investment and
FII.
It is expected that Sebi may explain the basis for its recommendation
that FIIs with 40 per cent of assets under custody will not be allowed
to issue fresh p-notes.
Sources say that the government is convinced that inflows from genuine
investors will not take a dip even as some categories of instruments
are banned or the Indian markets are made intimidating for the foreign
investors. Investors will choose other routes like the non-deliverable
forward market or the overnight interest rate swap market abroad.
The government feels the urgency to address the long-term issue of accessibility
of the Indian markets through more instruments.
Photo: Reserve Bank of India, Mumbai HQ in September 2024 by DesiBoy101, licensed under CC BY 4.0, via Wikimedia Commons.
