RBI Wants Tighter P-Note Regime

Sebi board meet today may discuss lock-in, curbs on sensitive sector inflows.

The Reserve Bank of India (RBI) has suggested stringent conditions for participatory notes (P-notes) that are issued even by registered foreign institutional investors (FIIs).

In a note sent 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 reiterated its earlier stance of a complete ban on P-notes.

If that is not possible immediately, RBI has suggested including two key conditions for issuance of P-notes by FIIs.

The first is limiting P-note investments in sensitive sectors such as real estate and financial services. The second is imposing a lock-in period for liquidating investments made under P-notes.

The RBI nominee on the Sebi board is expected to raise these issues at tomorrow's board meeting.

Sources close to the development said a lock-in period could help check speculative inflows. These recommendations are based on the second report of the Tarapore committee on capital account convertibility.

The sources said that there is a case for capping the P-note investments in sectors that have an upper limit on foreign investment -- both foreign direct investment and FII.

Sources added that Sebi will be clarifying at the board meeting the basis for its recommendation that FIIs with 40 per cent of assets under custody cannot issue fresh P-notes.

Sources said the government is of the view that banning P-notes will curb speculative inflows into India. Since the India growth story is strong, inflows from genuine investors cannot be stopped.

If some categories of instruments are banned or the Indian markets are made costlier for the foreign investors, investors will choose other routes like the non-deliverable forward market or the overnight interest rate swap market abroad over which Indian regulators do not have any control.

So the government feels it is important to address the long-term issue of accessibility of the Indian markets through more instruments.