Sandeep Parekh tells me that my posting yesterday is not quite clear. So let me restate my views differently.
- I think we should move towards capital account convertibility much faster and much more boldly than the CAC 2.0 report suggests. A freely convertible currency by 2010 should be the goal.
- I believe that it is impossible to ban Participatory Notes (PNs)
when portfolio investment is opened up to non institutional
investors. This is because:
- The PN is traded between foreigners outside India
- If neither party to the PN is an FII, then the PN does not involve any party who is regulated by or registered with an Indian regulator. Compliance with a KYC norm is not the same as acceptance of regulatory jurisdiction.
- The PN is a cash settled OTC derivative that does not require any money or securities to change hands in India.
- Even if for a moment one can think up a legal theory that creates jurisdiction, it is infeasible to exercise such jurisdiction. It is one thing to threaten to prosecute 500 FIIs. It is another thing to do that with 50,000 non institutional investors who do not even have a home country regulator.
- In an FII oriented regime where only a select few can invest in India, the regulation of PNs serves to prevent others from getting a back door entry. In the proposed regime where any body can come in through the front door, I do not understand why the government should go to great lengths to prevent anybody trying the back door. The whole debate about PNs makes sense only if the FII regime continues. The moment that is diluted, the case against PNs vanishes.