Unshackling PNs may work in long term

The Sebi move to remove the restrictions on participatory notes is unlikely to result in huge FII inflows in the short term...

The Sebi move to remove the restrictions on participatory notes (PNs) is unlikely to result in huge FII inflows in the short term, analysts said. This is because foreign investors are pulling out funds from markets across the globe in the wake of the global financial crisis.

However, FIIs will come back once the global situation improves, they said. PNs are derivative instruments issued by FIIs to other overseas investors seeking to invest in Indian securities, but are not registered with Sebi — either out of choice or regulatory issues.

“The message is that we need FIIs, we need hot money,” said Mehul Dedia, assistant vice-president of sales at Sharekhan. “But international markets need to stabilise for inflows to come in.” The Sensex witnessed a huge spurt last year when FII inflows were at their peak. “The removal of curbs will restore confidence but foreign funds are unlikely flow again immediately given the global turmoil,” said Arun Kejriwal, strategist at research firm KRIS. Analysts, however, feel the Sebi move will lead to inflows when the global market turmoil comes to an end. “There are a large number of family houses and long term investors who would like to invest in Indian market do not come here as they find the entry barrier very cumbersome and choose the market which are easier to enter,” said Shachindra Nath, group COO, Religare Enterprises Limited.

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Foreign funds have sold Indian stocks worth a net $9.4 billion so far in 2008 compared with record inflows of $17.4 billion last year. With the end of third quarter of the calendar year 2008 on September 30, hedge funds are bracing for heavy redemption due to the financial crisis. Investors in hedge funds are usually allowed to exit funds only on the final day of the financial quarter. This means large-scale investor redemption in hedge funds may trigger further selling by foreign funds in India. Hedge funds mainly operate through the PN route in India.

SEBI decisions

• Restrictions on issuing participatory notes where the underlying asset is a derivative removed

• Scraps a rule which said PNs could account for up to 40 per cent of the value of assets held by a foreign fund

• Moots a review of FII investment, to put out a consultative paper on this for comments from the public

With agencies

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