In October, Sebi had partly banned PNs in an effort to force some of these anonymous foreign participants in the Indian capital markets to register as FIIs. Since then, there had been an increase in such accounts.
FIIs and their sub-accounts were asked not to issue fresh PNs against underlying derivatives. They were also asked to wind up their existing positions in 18 months.
While the focus was primarily on the “quality of anonymous money”, the move also attempted to stabilize the foreign exchange value of the domestic currency against the US dollar, in which investments were being made.
According to Sebi, there were 34 FIIs and sub-accounts issuing PNs in August 2007 and the outstanding value of their exposure was at around Rs3,53,484 crore at that time. This constituted 51.6% of the net assets owned by all FIIs and their sub-accounts in India. Excluding PNs with derivatives as the underlying assets, the value was little more than 30% of the entire FII ownership in Indian markets.
According to Sebi guidelines, top foreign brokerages could issue PNs with underlying stocks purchased in the cash markets only by selling an equivalent amount of shares.
While Sebi’s move to contain a flood of foreign investments into India through this offshore product helped contain the sharp rise in the Indian currency and accelerated the entry of new FIIs, it has also led to a lot of capital outflow from the market.
Many of the earlier PN clients of large brokerages continue to take exposure to Indian stocks by trading in the derivatives contracts of the National Stock Exchange’s Nifty index in Singapore.
Some of the foreign brokerages which were champions of the PN business and a few domestic brokerages that purely serve institutional clients believe that Sebi could now review the curbs placed on such products.
According to these brokers, even if the regulator does not lift the curbs put on PNs, it could simply introduce a new product to bring back a section of global investors to the Indian market who prefer to play from outside.
Sebi will on Wednesday review rules on PNs, according to an official at the regulator who did not want to be named,
Mobis Philipose and Reuters contributed to this story.