PN flows to derivative segment rise

While PN investment of FIIs in the cash market came down to Rs 126,329 crore,or 12.4 per cent of their assets,in February 2011 from Rs 140,397 crore 15.1 per cent of assets in April 2010,their total investment cash and derivatives has gone up from Rs 154,340 crore 16.6 per cent of total assets in April 2010 to Rs 171,601 crore 16.9 per cent by February 2011.

This indicates an inflow of Rs 45,000 crore through PNs in derivative segment in the last 11 months.

Market observers said one reason for the persisting interest in derivatives could be tax benefits. Income of FIIs from derivatives trading will not be liable to tax in India,as per the Authority for Advance Rulings. PNs classified under offshore derivative instruments are issued by Sebi-registered FIIs to their overseas investors,who wish to invest in the Indian stock markets without registering themselves with Sebi.

Under this system,FIIs route their purchases of shares through brokers and then issue PNs to their overseas clients which indicate the underlying stocks. Foreign clients get dividends or capital gains collected from the underlying securities.

The main issue about PNs is non-transparency. The source of funds and the identity of foreign investors putting money in PNs are always hazy. On the other hand,Indian investors have to disclose the full details about their funds and identity while putting funds in the market,leaving an uneven playing field. Theres also a fear that PNs bring in hot money which comes into the country suddenly and exits at the same speed.

Sebi initially banned PN investment and later lifted the ban but made several changes in the registration process. In October 2008,the Sebi had lifted one year-old decision under which the regulator had placed a 40 per cent ceiling on FIIs issuing PNs through sub-accounts,and had completely banned any such instruments that were based on Indian stocks or index derivatives. Sebi had slapped the restrictions on the PNs in October 2007 following excessive speculation and huge FII inflows.

The regulator had widened the definition of FIIs and allowed non-resident Indians NRIs and overseas sovereign wealth funds SWFs to register as FIIs and invest in shares and government securities. Asset management companies,investment managers or advisors or an institutional portfolio managers set up and/or owned NRIs are eligible to be registered as FIIs subject to the condition that they would not invest their proprietary funds.

EXIT CASH,ENTER DERIVATIVES

PN investment of FIIs in the cash market came down to Rs 126,329 crore,or 12.4 of their assets,in February 2011 from Rs 140,397 crore 15.1 of assets in April 2010

FIIs investment cash and derivatives has gone up from Rs 154,340 crore 16.6 of total assets in April 2010 to Rs 171,601 crore 16.9 by Feb 2011

This indicates an inflow of Rs 45,000 crore through PNs in derivative segment in the last 11 months

Experts say one reason for the persisting interest in derivatives could be tax benefits. Income of FIIs from derivatives trading will not be liable to tax in India,as per the Authority for Advance Rulings