P-Notes back on SEBI agenda

P-Notes back on SEBI agenda

Participatory Notes are once again on the agenda of the capital market regulator, with the Securities and Exchange Board of India (SEBI) set to begin a review of the entire “regulatory framework” governing these instruments at its board meeting on August 13.

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The return of PNs to the agenda of the SEBI board has triggered expectations among market participants that the capital market regulator may look at easing some of the restrictions that were introduced in October 2007 as there has been a change in the economic environment and also in the market conditions.

At the time, SEBI had proposed that foreign institutional investors (FIIs) and their sub-accounts cannot issue or renew PNs with underlying as derivatives with immediate effect.

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They had to unwind their current position within 18 months. The capital market regulator had also said that FIIs cannot hold over 40 per cent of assets in PNs. Official sources indicated that part of the review could include a fresh look at the 18-month deadline in view of the recent developments in the market.

“A lot of data has flowed in on PNs since October last year. This would help us in the review on August 13,” official sources said. They added that any decision on policy change was unlikely on the same day as it would be the first meeting on the subject.

FIIs are concerned that their sub-accounts have been barred from participating in futures and options. Moreover, the capital market regulator had ordered winding up of PNs issued to investors in unregulated jurisdictions.

PNs are offshore derivative instruments that allow foreign investors to invest indirectly in a country’s stock markets without disclosing their identity. The October 2007 restrictions on PNs were brought in the backdrop of copious capital flows into the country.

Ever since the curbs on PNs were announced, the FIIs had been net sellers, initially due to these restrictions and later beginning January 2008 on account of global financial turmoil following deepening of US sub-prime crisis.

“Since the start of the calendar year, it is difficult to say whether FII selling was driven by curbs on PNs or was it due to global financial turmoil. It looked to be combination of factors,” sources said.

In the meanwhile, SEBI had overhauled the entire FII regulations and also simplified the process of their registration with the regulator. Official sources said that there was no problem as such on FII registrations now and indicated that the board would not consider this subject on August 13.

However, of late, there are concerns of market business being driven out of India to places like the Singapore stock exchange, where volumes of trading on Nifty futures and options have surged in recent times. This may now compel SEBI to take measures to discourage participants to shift to alternative market places.

Source: SIfy