Sebi looking again at P-notes

The Securities Exchange Board of India is expected to review restrictions on the issue of participatory notes...

The Securities 038; Exchange Board of India Sebi is expected to review restrictions on the issue of participatory notes PNs by FIIs at its board meeting scheduled for Wednesday. This is considered significant, as both the government and the markets regulator have so far stonewalled all requests for such a review. Sebi is also expected to decide shortly on making the current Securities Lending 038; Borrowing SLB Scheme more practical and market friendly.

8220;Sebi has a lot of data and experience on P-notes now, which it will use to revisit the issue,8221; a government official said. A final decision on the subject may, however, take some time. 8220;You don8217;t expect the first review meeting to relax curbs,8221; he pointed out. The securities market will keenly watch the board meeting on Wednesday.

This will be the first review of the P-note curbs 8212; including the ban on FIIs and their sub-accounts from issuing or renewing P-notes 8212; imposed by Sebi in October 2007. P-notes are derivative products with shares or derivatives as underlying, issued by FIIs to overseas clients who cannot invest directly in India.

Apart from transparency concerns, P-notes were also restricted in a bid to moderate capital inflows that were booming at the time. That is no longer a problem. Compared with last calendar year8217;s net inflows of 17 billion, 2008 has seen net capital outflows of 6.4 billion so far.

Given that reversal, FIIs had asked the finance ministry to consider easing the restrictions, which had adversely affected their investments into India. The ministry had requested Sebi to assess the impact of those regulations and consider a review, especially since derivatives-on-derivatives are insignificant from the capital inflows point of view. Sebi had sought feedback from market intermediaries and FIIs on the issue. The proposal to review the SLB Scheme, meanwhile, is aimed at making it popular among all sections of investors, and bring to a halt activities outside its ambit. The scheme was reintroduced earlier this year after a gap of 11 years.

A senior Sebi official said, 8220;What we are going to do is not product tweaking. We are undertaking a process review with the sole intention that volumes under the scheme should pick up.8221; Among the changes expected are an extension of the trading window under SLB from the present one hour, extension of the contract from the present seven days to a month, expanding the list of securities eligible under the scheme and asking stock exchanges to make margins for the scheme more realistic.

Take Note

What are P-notes?

P-notes are derivative products with shares or derivatives as underlying, issued by FIIs to

overseas clients who cannot invest directly in India

What are the P-Note curbs?

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Issue by FIIs and their sub-accounts was banned by Sebi in October 2007

What prompts the review?

Flood of capital inflows has reversed and curbs have hit FII investments