P Notes......
Dear Mr.Fire,
Foreign investors are not allowed to invest in Indian equities directly
unless they are registered with SEBI. They approach the Foreign Institutions
who are registered with SEBI and invest their funds thru' them. The FIIs
purchase on behalf of their clients and the FII's affiliates issue ODI
( offshore Derivatives Instruments ) to them. The underlying asset for the
ODI is either stocks or equity derivatives like Nifty futures. Participatory
Notes ( PN ) is one of the categories of ODIs. The returns to the original
investors could be appreciation of stock or some other arrangement.
The individual identity of the original investors is not known and there is a
lurking fear that this may be one of the ways of bringing into the country
funds lying abroad by some people - it may be industrialists or politicians
or anyone else. There is another apprehension that the terrorists might
be pumping money into our country via this back door.
Through this route, the inflow of foreign funds into this country in
october,07 alone is USD 5.45 blln and during this year upto october 07
is USD 17.69 blln.
In March,04, the value of PNs outstanding was just 31,775 cr INR and
it is now INR 3,53,484 cr.
The effects of such massive inflow are :
- rupee appreciates; imports become cheaper; export earnings dwindle.
- depending upon repatriation of dividend or proceeds of resale, the
value of INR will fluctuate in future.
Stock prices have risen sharply due to large inflows, quite unconnected
with the intrinsic value of the shares. When FIIs offloaded the shares, the
fall also was steep . A volatile market was witnessed, which is undesirable.
For some years now, RBI has been cautioning the Finance Ministry about
such large inflows and its impact on the economic fundamentals.
SEBI wants to impose some restrictions on PNs and wants transparency as
regards the original investors. Their Board will meet on the 25th Oct,07
to take a final decision.
