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"The Reserve Bank's stance has been that the issue of PNs should not be permitted," RBI chief general manager, Vinay Baijal, said in a dissent note on the recommendation of an expert group that looked into the FII flows.
The panel, headed by chief economic advisor Ashok Lahiri, had stated, "The current dispensation for PNs may continue."
However, Vinay Baijal, a chief general manager at RBI and one of the members of Lahiri panel, said in his letter: "The main concerns regarding issue of PNs are that the nature of the beneficial owner or the identity of investors will not be known, unlike in the case of FIIs registered with a financial regulator."
"Trading in these PNs will lead to multi-layering, which will make it difficult to identify the ultimate holder of PN," he said.
Both conceptually and in practice, he said "restriction on suspicious flows enhance the reputation of markets and lead to healthy flows. We (RBI) therefore reiterate that issuance of PNs should not be permitted."
On debt exposure of FIIs, RBI differed with Lahiri panel. While the Lahiri panel recommended that FIIs may be allowed to switch between equity and debt investments in India, the RBI official said "it would not be appropriate to permit FII to treat debt securities - both government and corporate bonds - as an investment avenue."
RBI objected to the proposed move of allowing FIIs to switch from equity to debt as long as there is a wedge between the India's inflation rate and the debt yield with the rest of the world.
While the requirement for operational flexibility of FIIs is narrow, RBI said there should be a ceiling on FIIs' total debt exposure and not on incremental basis as suggested by the Lahiri panel.
On other aspects, there was more or less agreement between RBI and Lahiri panel, which also had two members P K Deb and U K Sinha representing Finance Ministry, and Pratip Kar from SEBI.