Guidelines may be relaxed with strict quality checks.
The rules governing participatory notes may be relaxed with the Reserve Bank of India initiating a review in consultation with the Securities and Exchange Board of India and the government.
Sources close to the developments said the review of the guidelines for offshore derivative instruments, including PNs, is a major agenda for the central bank under the new governor. Various options are being explored to relax the norms with proper checks and balances for ascertaining the quality and the sources of funds coming through this route.
The sources said market views will be taken before the draft report gets finalized.
PN is a derivative instrument used by a foreign entity to invest in India even without registering itself with the Indian regulator. The user can be an FII registered with Sebi, its sub accounts, hedge funds, pension funds among others.
One of the options being considered is to open up the investment route for non-resident Indians (NRI) who could either invest through an FII or the PN route. However, there will not be any review of the ban on investments by overseas corporate bodies.
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The initiative to relax the PN route is a major shift in RBI’s stance as the central bank has all along been advocating a ban on investments through PNs in view of the opaque nature of the instrument which makes it difficult to assess the quality of the funds.
The sources said while the quality aspect still remains a major concern, RBI is no longer in favour of a complete ban.
To start with, the registration norms could be streamlined to make it easier for Sebi to gather data on the source of funds. It doesn’t matter which route an FII is adopting for entering the Indian markets as long as they are transparent in their funds sources and registration norms.
Another major decision will be to relax the limit posed by Sebi on investments through PN. The market regulator had in October 2007 proposed that PN investments by each FIIs should be capped at 40 per cent of the assets under custody (AUM) by the custodian of the FII in India.
This cap could either be completely removed or raised so as to facilitate higher investments through PNs. A custodian is usually a foreign bank which acts as a banking channel for the flow of funds. Sources added that the cap could be removed in a phased manner to take care of market volatility.