Sebi on track to phase out PNs

Sebi on track to phase out PNs

Mumbai: Market regulator M. Damodaran’s promise on Monday night to revisit existing rules that require foreign institutional investors (FIIs) to register themselves with the regulator even as the Securities and Exchange Board of India (Sebi) plans to move ahead with curbing so-called participatory notes (PNs) could trigger a positive response in the Indian market, said hopeful domestic brokers and foreign fund managers.

That’s because the market had already factored in regulatory curbs on such investment instruments, known as PNs and used by unregistered foreign investors to gain exposure to Indian stock markets, they said.

Speaking to foreign institutional investors in a videoconference, Sebi chairman Damodoran said the regulatory body has enough responses from both foreign and domestic investors to make a call on proposals to restrict issuance of PNs.

“We believe that the responses we have on board at this point of time are adequate for us to take the process forward," he said. “We will seek to expedite the process of regulatory registration as well as revisit the content of regulation to see what other categories of investors that were until now kept out of the registration process can be facilitated to access the Indian market by being included as eligible entities in the registration process. We have got started on that already."

As a result of that, the stock market is expected to trade on a positive note in the short term, said Nilesh Shah, chief executive of Ambit Capital Ltd. “There could be some amount of volatility till 25 October," he said. “However, it is unlikely that the regulator may take steps that could hurt the current investors."

Sebi plans to announce its decision on curbing investments through PNs on 25 October.

While some investors find PNs interesting because of the flexibility it offers and some others because of the lack of transparency that it offers, Damodaran said: “We do not want a market indefinitely having elements of non-transparency. We want a situation where we know the quality of money that comes into our market."

However, PNs will be kept alive for those investors who will not otherwise be able to access Indian markets because of Sebi regulations.

“No matter what our discomfort with some categories of participatory notes that have been issued by the market, the instrument is here to stay," he said.

“It’s not going away tomorrow, or next year, or a few years from now.

“The instrument will be around until everyone is enabled to come directly into the Indian market and does not need an instrument of that kind. That is a matter of larger policy."

Two Singapore-based fund managers said they expect the regulator to ease its stand on hedge funds registering in India.

“We have signed up with a law firm in Mumbai to advise us on the current situation. Since there will not be a ban on the investment instrument, the focus will be on how the entry norms are eased," said the managing director of a Singapore-based hedge fund, who didn’t want to be identified.

Some FIIs have sub-accounts dedicated to PN issuance, noted Damodaran. “Going forward, there would be differential treatment [for] FIIs that choose to do business that way," he said.

“What we are doing is stating that those sub-accounts could put in their applications for registration as FIIs and, if we have evidence that such applications are coming in, for the period that registration has not taken place, those sub-accounts will, as an interim measure, be allowed to continue the business."

Proprietary sub-accounts that are interested in converting to FIIs should inform Sebi within 24 hours of Monday’s videoconference, through a letter of intent and their correct and complete application should reach the Sebi office within a week, said Damodaran.

There is no upper limit for such sub-accounts that want to get registered as FIIs.

Citibank has already registered one of its sub-accounts as an FII with Sebi, he said.

Since Monday morning, the regulator has cleared 16 new FII applications, he added.

“With lot of new foreign investors rushing to get FII applications, there is no more panic in the market with regards to outflow of FII money, said Jignesh Shah, head of institutional sales at SBI Capital Markets Ltd. “After the derivative expiry day, market is expected to function in its normal course."

(Reuters contributed to this story.)