The Hindu : Business : RBI opposes panel views on PN issue

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Wednesday, Dec 07, 2005

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Business

RBI opposes panel views on PN issue

Special Correspondent

NEW DELHI: The Reserve Bank of India has opposed a Finance Ministry panel recommendations on allowing foreign institutional investors (FIIs) to issue participatory notes (PNs) and permitting them to take exposure in debt instruments.

In a dissent note on the recommendations of the expert panel headed by the Chief Economic Advisor, Ashok Lahiri, the RBI Chief General Manager and a member of the Lahiri panel, Vinay Baijal, said: "The RBI's stance has been that the issue of PNs should not be permitted... Trading in these PNs will lead to multi-layering, which will make it difficult to identify the ultimate holder of PN."

While the Lahiri panel, which looked into the FII flows, recommended continuation of the current dispensation for PNs, Mr. Baijal said: "The main concerns regarding issue of PNs are that the nature of the beneficial owner or the identity of investors will not be known, unlike in the case of FIIs registered with a financial regulator.''

FII debt exposure

Reasoning further, Mr. Baijal said both conceptually and in practice, the restrictions imposed on suspicious flows increased the reputation of markets and led to healthy flows. "We [the RBI], therefore, reiterate that issuance of PNs should not be permitted,'' he said. On the debt exposure of FIIs also, the RBI had differences of opinion with the panel. Even as the Lahiri panel viewed that FIIs may be permitted to switch between equity and debt investments, the RBI official maintained that it would "not be appropriate to permit FIIs to treat debt securities — both Government and corporate bonds — as an investment avenue.''

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