General Studies (Paper - 3) : Model Question & Answers

Question: The presence of Participatory Notes in the Indian share market is more a reflection of corrective policy measures related to foreign investment needed from government and SEBI rather than just the goal of money laundering.' Comment with appropriate arguments.

Answer: P notes are issued to the hedge funds by the FIIs as the hedge funds are willing to invest in the Indian capital markets but without getting registered with SEBI. It is argued that it might cause money laundering as hedge funds can bring in black money in the Indian economy through FIIs. While there is some truth in the above argument, it is not completely correct because interest of such investors in the Indian capital market itself reflects global interest in Indian assets.

It has been argued that PNs create volatility because these investors are looking for maximum profit which results not only from the nature of market but its taxation and regulatory regime as well. The SIT on black money wants to know the ultimate beneficiary of a PN transaction. This is difficult because PNs are a reflection of a net position between all buyers and sellers, it’s impossible to pinpoint the ultimate beneficiary owner. Also, the regulator has the ability to trace the ownership chain only after an investigation starts.

Taking another viewpoint, if a person in India buys a derivative in India and sells it to an investor in London, India does not have the right to ask about the London investor except in the context of an investigation. If we want better knowledge about the beneficiary owner, we would do well to reform tax policy, capital controls and financial regulation to bring the business directly to India. This would be more effective in strengthening regulatory control, without destroying muchneeded global flows into India.