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The committee will have representatives from the Securities and Exchange Board of India (Sebi), the Reserve Bank of India (RBI) and the finance ministry.
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The committee on capital markets, headed by Reserve Bank of India Governor YV Reddy, in its last meeting in New Delhi discussed volatility in the capital markets since the beginning of this fiscal.
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Participatory notes are like contract notes and are issued by foreign institutional investors to their overseas clients who may not be eligible to invest in the Indian stock markets.
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Foreign institutional investors invest funds on the behalf of such investors, who prefer to avoid making disclosures required by various regulators.
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In the 2001 stocks scam, the use of participatory notes by overseas corporate bodies had come under investigation by Sebi.
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On the recommendations of a joint parliamentary committee on the stocks scam, the government banned overseas corporate bodies from operating in the secondary market and, recently, from the primary market as well.
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While the Sebi report in 2001 did highlight that overseas corporate bodies used participatory notes, the government did not go into it further.
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Instead, it focused on the role of overseas corporate bodies, arguing instruments like participatory notes were needed to drive volumes in the stock markets.
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The regulators and the finance ministry are of the opinion that the movement in the markets this time round is based on fundamentals.
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They also see no evidence of any foreign institutional investor having indulged in malpractice. However, there is a need to consider legal changes to reduce volatility in the market.
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The sub-committee will submit a report on participatory notes in the next meeting of the committee on capital markets.
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Incidentally, Sebi has informed the RBI and the finance ministry that less than 20 per cent of foreign institutional investor money flowing into the stock market is through participatory notes.
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Taking a relook
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The committee will have representatives from the Sebi, the RBI and the finance ministry
The panel will submit a report on participatory notes in the next meeting of the committee on capital markets
The regulators and the finance ministry are of the opinion that the movement in the markets this time round is based on fundamentals
They also see no evidence of any foreign institutional investor having indulged in malpractice
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