Use of Participatory Notes in Indian Equity Markets and Recent Regulatory Changes
IMF Working Papers, December 1, 2007
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- Use of Participatory Notes in Indian Equity Markets and Recent Regulatory Changes
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Bibliographic details
- Authors: Manmohan Singh
- Published: December 1, 2007
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451868548.001
Scope and primary focus
- Examines the use of participatory notes (PNs) by foreign investors as a conduit for portfolio flows into Indian equity markets for more than a decade.
- Analyzes the broadening of India's foreign investor base, noting a bias towards hedge funds/unregistered foreign investors who invest primarily via PNs.
- Investigates paradox: although tax arbitrage via capital gains tax has "almost disappeared since July 2004", demand for PNs has increased since that date.
- Suggests reasons for the continued buoyancy of the PN market and explains the possible impact from recent regulatory changes.
Key findings and observations
- PNs have been a significant conduit for portfolio flows into Indian equities for over a decade.
- The changing composition of foreign investors shows a bias toward hedge funds and unregistered foreign investors who rely on PNs.
- Despite the near elimination of capital gains tax arbitrage since July 2004, PN demand rose rather than fell.
- The paper articulates multiple reasons for persistent PN market activity and analyzes how recent regulatory changes could affect that market.
Subjects and keywords
- Subjects: Capital gains tax, Currencies, Hedge funds, Securities, Stock markets
- Keywords: derivative instrument, hedge fund, investor, PN derivative leg, regulator, WP