January 23, 2004 PR No.19/2004
FII Investments through Participatory Notes (PNs)
SEBI would like to reiterate that there is no change in its policy of FII investments in India except by way of strengthening the "know your client" regime. This is felt necessary in the interest of the efficacy of the market. With effect from 3rd February, 2004, overseas derivative instruments such as Participatory Notes (PNs) against underlying Indian securities can be issued only to regulated entities and further transfers, if any, of these instruments can also be to other regulated entities only. FIIs/sub accounts are required to ensure that no further down stream issuance of such derivative instruments is made. In order to give effect to this decision, necessary amendments to the Regulations are being notified. To discharge regulatory responsibilities, SEBI would need to be in a position to ascertain, if circumstances so warrant, details of the ultimate investors investing through PNs etc. in the Indian market. The FIIs issuing such derivative instruments are therefore required to exercise due diligence and maintain complete details of the investors, based strictly on "know your client" principles.
To facilitate the process of transition, derivative instruments already issued and outstanding against un-regulated entities will not be required to be terminated immediately. It has been decided that the said contracts will be permitted to expire or to be wound – down on maturity, or within a period of 5 years, whichever is earlier. Circular to this effect is also being issued.