Ban on participatory notes unjust: Assocham

New Delhi, Sep 5 (UNI) Disfavouring ban on participatory notes (PNs), Industry body Assocham today said that risks perceived in their continuation have been overstated and will dampen spirits of FIIs and others to park their surpluses in Indian stock market in case this recommendation of Tarapore Committee is accepted.

In a statement, it said that any misjudgement of risk related to the PNs will also stifle the countries 4 billion dollar derivatives market.

''As a growing number of investors seek more exposure to emerging markets such as India without investing directly, the use of participatory notes is becoming widespread. These derivative instruments, capped return notes, participating return notes and investment notes are issued outside the home country and are based on the value of home country securities,'' Assochem President Anil K Agarwal said.

The final structure of the transaction is such that the issuer is fully hedged while the investor gets full exposure to the local capital markets, he added.

The market for participatory notes in India is nearly Rs 20,000 crore. These investments have added to the depth of the secondary and derivatives market and improved market sentiment in the primary market.

However, the Chamber has welcomed majority of the recommendations of the Tarapore Committee on Capital Account Convertibility (CAC) like automatic approval of ECBs up to 1 billion dollar, permission to individuals to send up to 2,00,000 dollars overseas and allowing mutual funds to invest up to 2 billion dollars in overseas stock.

It added that banning participatory notes, as suggested by the Tarapore Committee, does not seem to be a feasible solution, as it constitutes a substantial share of the total foreign institutional investment and provides vibrancy and liquidity in the trade market.

A possible solution could be a greater transparency, clear guidelines and compliance of the fiscal targets set by the FRBM Act, primarily to contain inflation at the desired level, Mr Agarwal said.

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