FinMin panel on FII inflows, PNs

The finance ministry has constituted a working group to recommend changes in the existing policies on FII inflows and participatory notes, with a view to attract more foreign portfolio investments.

The move comes despite the rising apprehensions in some quarters over the surge in foreign capital flows and even calls to tax/control the same, as it is leading to steeper appreciation of the rupee.

The rupee has appreciated over five per cent against the dollar in the last six months, bad hitting the exports sector.

Portfolio investment is a route through which foreign entities can purchase shares or bonds or money market instruments but without enjoying ownership or management control of the entities they invested in. Participatory notes are one of such routes through which unregistered entities invest in the domestic stock markets.

The 16-member group on portfolio investments, to be headed by UTI MF chairman and managing director UK Sinha, will also review the policies on other foreign portfolio investment by NRIs and venture capital funds, sources said.

The committee has been given four months to submit report.

The group has been asked to review the existing policy on foreign portfolio inflows and suggest rationalisation with a view to encourage foreign investment and reduce policy hurdles, the sources added.

The group is also expected to identify challenges in meeting the financing needs of the economy through foreign investment, they informed.

The body would also examine the rationale of securities transaction tax and stamp duty.

There are already contrasting views from RBI and the finance ministry over participatory notes.

While the Reserve Bank does not favour PNs, the finance ministry has so far ruled out any ban on these instruments.

In fact, the market regulator Sebi has imposed curbs on investment through PNs in 2007, when rising capital inflows led to appreciation in the rupee, hitting exports. However, these restrictions were lifted last year after foreign funds dried up due to the global financial meltdown.

FIIs have net invested over Rs 73,000 crore (Rs 730 billion) in the domestic equities markets this fiscal so far. These institutional investors had earlier started selling stocks after global financial crisis deepened from the middle of last September.

Earlier, Finance Minister Pranab Mukherjee had said the current level of FII inflows were not disturbing and there were arrangements to counter them, if they created distortions.

The Economic Survey 2008-09 had recommended phasing out of the Securities Transaction Tax (STT), but it is yet to be scrapped. The STT is levied at the rate of 0.125 per cent for every transaction in cash for the delivery of shares.

Transactions in derivatives trading attract a lower STT of around 0.017 per cent.