According to government estimates, the value of participatory notes (PNs) in the stock market grew 70 per cent in just one year between January 2006 and January 2007, accounting for over one-third of total foreign portfolio investments in the Indian stock markets.
PNs are offshore derivative instruments issued by foreign institutional investors (FIIs) to unidentified overseas investors who are not eligible to invest directly in Indian stocks.
The RBI has criticised PNs, which do not require fund source disclosures, terming them a conduit for money laundering by Indian companies and for hedge funds, which are not permitted to trade on the Indian bourses.
Hedge funds, in particular, which are known for their quick entry into and exit from stock markets, were blamed for the high volatility of Indian stock prices ever since the 2,000-point crash of the benchmark Sensex in May 2006.
But contrary to conventional wisdom, the share of hedge funds in total PN investments in the Indian stock markets could be as little as 8-9 per cent.Earlier estimates put hedge funds’ share at 70-80 per cent of total PN investments, which formed the basis of demands for a ban on this instrument.
Read more in The Business Standard article.
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