Sebi did not spring any major surprises after its board meeting on Thursday. The rules to regulate money coming into the Indian stock market through participatory notes (PNs) are largely in sync with those initially put out in the discussion paper on 16 October.
But there is a twist in the tale. The regulator has said that foreign investors who are regulated in their home countries will be allowed to invest in PNs. Till now, Sebi had said PNs would be open to those who are registered. This switch in approach could shove some hedge funds out of the market, at least initially.
Despite what some critics may say, the new regulations do not amount to capital controls. Given the global debates, more countries will push for hedge funds’ regulation in the months ahead.
We will now have hedge funds coming in through the front door. It is a tautology that hedge funds need to hedge. Sebi now needs to push for a deeper and more varied derivatives market.