New Delhi, 26 September Foreign investors are using Participatory Notes (PNs) to bypass domestic regulations to invest in India’s equity markets, the International Monetary Fund (IMF) has said in a report.
“Many international investors are able to acquire exposure to Indian markets while avoiding India’s regime of restriction on foreign participation through an increasing number of channels, particularly as derivatives markets have grown,” IMF’s Global Financial Stability report said.
Foreign investors, including hedge funds, are gaining entry into the Indian equity market through purchase of PNs offered by registered FIIs, the report said, adding they allow “offshore participants to gain exposure to Indian equities without registering as an FII”.
Other channels through which foreign investors are increasing their exposure in the Indian markets without complying with domestic laws include derivatives and Foreign Currency Convertible Bonds (FCCBs).
The IMF report said investments through different channels often make it difficult to distinguish between foreign direct investment and portfolio inflows.
Pointing out that FCCBs are packaged into “structured credit products, such as credit-linked notes and collateralized debt obligations”, it said. Further, while offshore Indian subsidiaries purchase the debt component, the equity is being picked up by hedge funds and other international investors.
For Indian companies, it added, “access to low-cost financing through FCCBs is worth this minor dilution in their equity stake”.