Sebi and the government continue to dither on the problem of participatory notes (PNs). PNs are over-the-counter (OTC) derivatives (i.e. bilaterally negotiated derivatives) on Indian equity that are transacted offshore. Restrictions on PNs are supposedly motivated by the need to do supervision of the stock market. This is a canard. All over the world, there are enormous OTC derivatives markets that thrive alongside exchange-traded markets. The managers and supervisors of the London Stock Exchange, New York Stock Exchange, etc., seem to be very comfortable with delivering on their supervisory responsibilities on these exchanges, despite the OTC derivatives market that flourishes alongside. If Sebi feels it does not know how to achieve its supervisory functions when there is an OTC derivatives market, it should depute a team to visit these exchanges and their regulators. What should not be tolerated is putting a crimp on the Indian financial system because Sebi lacks the requisite abilities. NSE used to be the premier venue for trading Indian index futures. Thanks to the restrictions on PNs, a substantial amount of business has shifted to the Singapore exchange, which now has Nifty futures trading which is more than half of NSEs, by some measures. India has lost marketshare and financial services revenues, owing to mistakes by the government. As the Percy Mistry report has emphasised, India can be a major player in the global market for financial services. It is ironic that even before we have begun on that path, our early moves constitute a self-goal.
India has reaped enormous benefits by a highly limited opening of a closed economy. That process of opening must go on. The way forward consists of moving on with the removal of capital controls, and not going back to having more of them. The FII framework was an appropriate idea in 1992. Its utility needs to be increasingly questioned. What does India gain by having a foreign company come to Sebi and register itself Would it not be better for India to remove the FII framework altogether, and only ask foreign investors to have direct depository accounts with NSDL or CDSL This way, an entire layer of a permission raj would be eliminated. In addition, the possibility of policy mistakessuch as the restrictions on PNswould also be removed.