The RBI’s recommendation on the fuller capital account convertibility appears to have been overshadowed by the recommendation on the P-notes.  P-notes are a very important instrument through which, a lot of foreign money flows into the Indian markets. Any suggestion to phase it out is seen to have adverse impact on the markets’ sentiments.

However, there are many other recommendations in this report other than the one on the P-factor. The report has also suggested lowering the Government’s stake in the PSU banks and allowing greater capital flows from FIIs in debt, from NRIs into the capital market, from companies for investing overseas.

CNBC-TV18 looks at all these issues with CAC Committee member, AV Rajwade and Rajiv Malik of JP Morgan.

Excerpts from CNBC-TV18’s interview with AV Rajwade and Rajiv Malik:

Q: The one recommendation, which has created the most controversy to which the ministry of Finance this morning says that they are unwilling or not very keen on accepting that is your recommendation on participatory notes? Could you tell us why did you recommend that this be phased out and whether all members of the committee were fully aware of the ramifications of such a recommendation?

Rajwade: If you have read the report, one of the points on which I have dissented with the committee is very specifically on the issue of P-notes. The committee has recommended that the P-notes should be banned. But Dr. Bhalla and I have disagreed with the majority recommendation. We have both placed our dissents, which are part of the report.

Our view was that there are a lot of genuine investors, who also come through the P note route either because for one technical reason or another, they cannot get registered as FIIs or that they may not wish to go through the hassles of doing so. So there are genuine investors, who would like to follow the P note route.

There are suspicions that some resident Indians use that route to round trip money, it gets transferred from here and comes back through the FII route. It is quite possible that the avenue is being used by some people.

But in our mind if they are violating the law, then there are other ways of catching them. So my dissent was that the P-note should not be banned. Also because the Lahiri committee went into it in some detail only recently and the Lahiri committee recommendations should be followed.

Q: Who were the members who were pressing for this P-note ban if you could tell us and despite the dissent between the two of you why was it taken up as a final recommendation then and what were the concerns, which were highlighted?

Rajwade: To try and say who was pressing and who was not pressing, I do not think that would be a right way of looking at it. You have a list of the members of the committee, two have dissented and the other four have agreed. I imagine that their worries about the P-notes route being used by resident Indians were probably more than those of the others who dissented.

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