Financial Daily from THE HINDU group of publications
Monday, Mar 06, 2006
Financial Daily from THE HINDU group of publications Monday, Mar 06, 2006 |
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Stock Markets Markets - Regulatory Bodies & Rulings Participatory notes here to stay Sarbajeet K. Sen
What are they? PNs are instruments akin to contract notes issued by registered FIIs to overseas clients, who are not eligible to directly invest in the Indian capital market. The instruments are issued against an underlying security thereby helping the holder to benefit from the capital appreciation or income from that underlying security.
New Delhi , March 5 Participatory Notes (PNs), the much-debated capital market instrument, are here to stay despite concerns raised by the Reserve Bank of India. However, as a measure to check their misuse, the Securities and Exchange Board of India would soon have added powers to track the beneficiaries of PNs should the capital market regulator at any point require such information. The High-Level Committee on Capital Markets (HLCC) is likely to soon put its formal stamp of approval for a subtle, yet significant, change in the regulatory requirement by making it mandatory for PNs to be issued only to entities that are `regulated by a financial regulator' of a country. This is against the present requirement that such instruments can be issued only to `regulated entities'.
Change in wording
Officials said the change in wording from a `regulated entity' to an entity `regulated by a financial regulator' would bring about a world of difference in SEBI's powers to track holders of PNs. This is because, according to the International Organisation of Securities Commissions (IOSCO) agreement, it would become mandatory for a financial regulator to disclose details of holders of PN if sought by SEBI, since the Indian regulator is a party to the agreement. PNs are instruments akin to contract notes issued by registered FIIs to overseas clients, who are not eligible to directly invest in the Indian capital market. The instruments are issued against an underlying security thereby helping the holder to benefit from the capital appreciation or income from that underlying security.
Lahiri panel
The Lahiri Committee on `Encouraging FII flows and checking the vulnerability of capital markets to speculative flows' had debated the issue of PNs in detail. While taking note of the possibility of misuse of the instrument, the panel had favoured the continuation PNs with the rider that "SEBI should have full powers to obtain information regarding the final holder/beneficiaries or of any holder at any point of time in case of any investigation or surveillance action."
RBI against PN
However, in a dissent note, the RBI representative on the panel said the central bank "reiterated that the issuance of PNs should not be permitted." The member had pointed out that the main concern of the RBI was that "the nature of the beneficial ownership or the identity of the investor will not be known, unlike in the case of FIIs registered with a financial regulator."
Related Stories: More Stories on : Stock Markets | Regulatory Bodies & Rulings | Foreign Institutional Investors
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