FDI’s the route for foreigners in market

Cash rich foreigners are not welcome to get registered as sub-accounts of foreign institutional investors (FII).

The government is trying to solve the problem of participatory note (PN) for a long time. This step seems to solve the problem of PNs. The fall of market in May is said to be huge outflow of FII investment. The main problem with participatory note is that the investor name is not disclosed. They are registered with the FII and not with the SEBI. The FII invest on behalf of the PNs holder. So when there is any bad news in the market FIIs pullout their investment. As high net worth individuals were earlier permitted to invest through PNs the FII investment was huge. So if the huge investment is pull out the market starts falling at a rapid pace. This was the main reason for around 30% fall of market during the month of May and June 2006.

This step of government will restrict the HNIs to invest through PNs. So the FII investment will reduce. So the market will be less dependent on the FIIs. It means FII investment will have least affect on the market. Government is not baring HNIs to invest in India. They can invest directly through FDI. The FDI investment is more transparent and usually long term. So this investment will give more confidence to market.

This is a right suggestion given by the government. SEBI should accept this suggestion. The investment which is coming should come with right intension. Usually the FIIs try to book profit when the market is booming. Bu they pullout their investment when the market is falling. So the retail investors finds themselve as cheated as they are the looser in the entire affair.