Date:24/01/2004 URL: http://www.thehindubusinessline.com/2004/01/24/stories/2004012402340100.htm

Back Participatory notes only to registered bodies from Feb 3 — Five-year grace period for existing ones

Our Bureau

Investment through PNs is Rs 21,179 crore or 25 per cent of the total FII investment of Rs 84,762 crore till November 2003.

Mumbai , Jan. 23

ENDING uncertainties over the future of participatory notes (PNs), the Securities and Exchange Board of India (SEBI) on Friday ruled that PNs already issued and outstanding against "unregulated entities" will not be required to be sold in the market immediately.

SEBI also decided to regulate the fresh issue of PNs by making it mandatory that from February 3, PNs against underlying Indian securities can be issued only to the registered entities.

In a statement today, SEBI also said, "It has been decided that outstanding PNs against unregulated entities will be permitted to expire or to be wound down on maturity, or within a period of 5 years, whichever is earlier".

This means, SEBI has effectively decided to control the inflow of funds into the equity market through PNs in the future but allowed the outstanding PNs issued to unregulated entities remain invested for a maximum of five years.

According to market participants, the move is good for the market. "In the short-term, it will give a big boost to the market sentiment and in the long term, the regulation will help the market as whole," said a stockbroker.

During this week, there has been a huge volatility in the market leading to a sharp fall in stock prices on concern that SEBI might ban PNs issued by the FIIs. Investment in India through PNs is Rs 21,179 crore or 25 per cent of the total FIIs investment of Rs 84,762 crore till November 2003, according to SEBI.

There is also a fear that unregulated entities such as overseas corporate bodies (debarred to invest in secondary market) or Indian residents are investing in the stock markets through PNs.

SEBI also said that there was no change in its policy of FII investments in India except by way of strengthening the "know your client" regime.

From February 3, PNs or overseas derivative instruments, issued against underlying Indian securities, can be issued only to the regulated entities and further transfers, if any, of these instruments can also be to other regulated entities only.

The statement further said that the FIIs or sub accounts are required to ensure that no further downstream issuance of such derivative instruments is made.

The FIIs issuing such derivative instruments have been told to exercise due diligence and maintain complete details of the investors, based strictly on "know your client" principles.