PN route being misused by certain investors: forum

The Investors Grievances Forum has taken exception to the participatory note route of foreign institutional investment

The Investors Grievances Forum has taken exception to the participatory note (PN) route of foreign institutional investment, saying that it is being misused by certain investors who are using the facility in the primary market as well as in secondary markets.

“Unknown investors are abusing the system and routing their suspicious investments via Mauritius to the Indian markets,” said IGF president Kirit Somaiya.

According to Somaiya, a disturbing development in 2006-07 is the participation of these entities in IPOs through the PN route. “IGF brought to the notice of Sebi and the Finance Ministry the abnormal increase in applications through the PN route/sub-accounts in the last one year, “ said Somaiya.

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“The ultimate investor or beneficiary generally remains unknown. Various artificial layers have been created by these investors for investing both in primary and secondary capital markets,” he said at a press conference.

Participatory notes (PNs) are instruments used by investors or hedge funds that are not registered with the Sebi to invest in Indian securities. Indian brokerages buy securities and then issue PNs to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors whose identity is not known.

Somaiya said he has taken up the danger of anonymous PN route investment with the Finance Ministry and Sebi, and had also suggested that the market regulator probe the applications and investment in the recent IPOs of Ashtavinayak and Nissan Copper. “The recent IPO of Ashtavinayak for Rs 50 crore and Nissan Copper IPO for Rs 30 crore have a large number of applications through the PN route,” the IGF president said.

“The fear of terrorists mafia using the participatory note route has already been highlighted by the Reserve Bank of India, Sebi, SS Tarapore Committee, Ashok Lahiri Committee, Investors’ Grievances Forum and the Intelligence Bureau in the past,” the IGF president said.

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“The PN route is being misused… suspicious transactions and abnormal increase of investment through unknown PN route investors have taken place,” he said. The inflow of FII investment through PN route has been rising. “During 2005-06, about 88 per cent of the FII investment in India was through the PN route. In 2002-03, it was less than 15-20 per cent,” IGF said.

The Tarapore panel on full rupee convertibility had recommended a ban on participatory notes by foreign institutional investors (FIIs) and phase out current PN accounts. Though PN investments are anonymous, many foreign investors usually prefer the PN route to avoid high transaction costs.