The government’s move to tighten the noose on foreign investors who have large commitments in Indian market through participatory notes (PNs) may not have a heavy bearing on the market after an initial round of panic, because there is sufficient elbow room to prevent an exodus of funds.
“The impact will be marginal as the government has given 18 months to unwind the positions,” said a leading investment banker.
During this time, these foreign investors who are aggressive players in the market can register themselves either directly or through sub-accounts of existing portfolio investors (FIIs) and continue to hold Indian equities, experts pointed out.
“This is not a catastrophic situation and it would help only in curbing the inflow of illegitimate money,” said the CEO of a leading securities firm, who did not want to be identified.
Many of the serious players would get the FIIs status and continue to invest, market watchers contend.
Sources in the government said that 60 per cent of the total investments routed through participatory notes are controlled by five to six FIIs such as Morgan Stanley, Merrill Lynch, Goldman Sachs, UBS and Citigroup. Estimates show that the combined value of these investments would be in excess of $50 billion. “Since the inventory level (of equity) of some of these funds are so high, they facilitate trade among their own clients through the exchange of participatory notes, without trading at the domestic bourses,” said a market insider.