The growing abuse of Participatory Notes by banned Overseas Corporate Bodies expose serious flaws in the regulatory system.

Recently, the Securities and Exchange Board of India set up a technical committee to look into the misuse of Participatory Notes (PNs) by Foreign Institutional Investors (FIIs) after it found that almost 25% of the foreign fund inflow till October 2003 was invested in the market through PNs. Participatory notes are like contract notes issued by FIIs to their overseas clients who are not eligible to invest in the Indian stock markets. The market regulator found that two FIIs, Citigroup Global and Goldman Sachs, were allowing certain Overseas Corporate Bodies (OCBs) to invest in India. Some of these OCBs included those names such as CSFB who were banned from trading in the secondary capital market after Scam 2001. If that is the case, then it raises a concern over the current uptrend in the market, especially about the FII investments.

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