We are in the midst of severe competition among emerging markets to attract foreign investment. Therefore greater the certainty in the regime of rules greater is the attractiveness of a country and conversely if investors perceive a ‘commitment deficit’, fear and liquidation of investments follows. Let us also accept that to a foreign investor India is one among several destinations competing for its dollar. This has always been the mind of an investor.
Ensconced in the existing regime is an instrument called Participatory Note (PN), legally enshrined as Offshore Derivative Instrument(ODI).
Investments through PNs have waxed and waned to the tunes of the piper. In 2007, the now unthinkable happened – the INR-USD hit 39 on the back of a flood of foreign investments; a cap on investments through PNs at 40 per cent of assets under management closely followed.
Foreign Institutional Investors (FIIs) were frowned upon for running a borrowing and lending book outside India. PNs were blamed for hiding the identity of investors and allegations of round tripping were levied. The celebrated case of an FII denying information to the regulator was settled in the Supreme Court with the powers to call for information intact.
Fast forward to today. At Rs 60 to the US dollar, India is back to the wall, hoping the thin stream of foreign inflows would swell yet again. A ready solution is to polish the PN regime with a coat of certainty and bless it as an equally legit route for investment in India as much as any other that is on offer. Why the government of India should take such a step even if it is one of optics or rebranding, is due to two milestone events took place between 2007 and today:
1. India became a member of the FATF (Financial Action Task Force) — a global standard setting body in the fight against money laundering and financing of terror — and joined 34 other countries in this club.
2. The FIIs that issue PNs being regulated entities in India and in their respective home jurisdictions, were brought under a strict regime of reporting.
Let me expound on the implications of these events. As part of its commitment to the FATF, India enacted the Prevention of Money Laundering (PML) Act and rules followed by OEMs (other enforceable means) issued by sectoral regulators.
The concept of ‘beneficial ownership’ has become an