Column : PN doesn’t hurt

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: evasion, drug running or terrorism were not adversely affected.

The impact was felt with the Indian financial sector losing ground in international competition. The Indian index futures market, which had hitherto been dominated by NSE, became a duopoly with roughly two-thirds of the positions being on NSE and one-third of the positions springing up at the Singapore Exchange (SGX). Foreign investors who were buying PNs were more inclined to trade in ADRs, GDRs, or exchange traded funds (ETFs) on Indian indexes that are available outside the country. The depth of the Indian market was reduced and the depth of offshore trading venues improved.

With the change in leadership at RBI and SEBI, this entire episode will happily now become a bad memory. The decisions of October 2007 have been reversed. Transparency and enforcement against market manipulation are improved because a bigger part of the market will do KYC to SEBI.

However, bringing back the liquidity into India is not easy. In the onshore vs. offshore competition, there are several other constraints weighing against the onshore: the securities transaction tax, the FII regime, the difficulties faced by Direct Market Access in India, and the tax treatment of capital gains. As long as offshore venues had negligible liquidity, India dominated the business. But now that liquidity has been created offshore, through the trigger of October 2007, many customers will choose to simply stay on there even though the restriction against PNs is gone, owing to these other constraints. In other words, the damage done by the decisions of October 2007 will not be undone by reversing those decisions.

Some observers claim that SEBI and RBI have been spooked by recent market fluctuations into reversing the decisions of October 2007. This is factually incorrect, because the file trail that leads up to such a decision would have begun many months ago. Further, in the short run, just as banning PNs had no impact on capital flows into India, unbanning PNs will have no impact on capital flows into India.