The Telegraph
Since 1st March, 1999
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Sebi clears air on PNs
- Fresh rules for foreign investors

Mumbai, Oct. 25: Eighteen months from now, only regulated overseas entities will be allowed to invest in Indiaís securities markets.

A board meeting of the Securities and Exchange Board of India (Sebi) today laid out new rules for overseas investors who want to buy into Indiaís growth story.

Almost 40 per cent of overseas investment in the Indian capital markets comes through a derivative instrument known as participatory notes (P-notes or PNs) that are floated by both foreign institutional investors (FIIs) who are registered with Sebi and their corporate sub-accounts which are not.

Today, the Sebi board directed that henceforth P-notes should only be issued to entities that come under some regulatory regime.

It also decided that a new set of investors such as pension funds, foundations, endowments, university funds and charitable trusts or societies could now directly invest in the country by registering as FIIs.

However, they will not be subject to a regulatory requirement that applies to all other investors.

Sebi did not back down on the recommendations that it spelt out in its consultative paper on P-notes, which have been a source of concern for the government and the regulator. The new rules, which come into effect from tomorrow, state that unregulated sub-accounts of FIIs will have to wind down the P-notes they have issued within 18 months.

Similarly, FIIs will not be allowed to issue P-notes amounting to more than 40 per cent of their assets under custody (AUC).

If they wish to issue new P-notes, they will have to wind down their earlier exposures to that extent.

Those FIIs which are below the 40 per cent threshold will only be allowed to issue an additional 5 per cent of their AUC .

Sebi chairman told reporters after the board meeting that the reference date for calculating the AUC would be September 30.

Damodaran also said investments in the primary market would be included while calculating the AUC.

Sebiís sudden clampdown on P-notes on October 16 had spooked the markets amid worries that the FIIs would pull their money out of the Indian equity market.

The sensex had surged over 40 per cent since January on the strength of overseas investments estimated at $16 billion.

The market was relieved to learn that proprietary sub-accounts, which are owned by FIIs, would be allowed to register. Around 20 sub-accounts that were issuing P-notes have applied to Sebi for registration as FIIs.

The Sebi board decided that these applicants would be treated as if they were FIIs on the date decided for calculation of the AUC.

Analysts said that this would mean that these entities could issue fresh P-notes, subject to the 40 per cent stipulation.

Sebi also revised the definition of a broad-based entity. Under the new rules, these entities will be required to have at least 20 investors. Earlier, no single investor could invest more than 10 per cent of the corpus. This ceiling has been raised to 49 per cent.

Sebi also said the individual fund manager of the entity must have a verifiable track record of one year.

The market regulator also announced permanent registration for FIIs so that they did not have go through the hassles of seeking renewals every three years.

Marketmen said the Sebi decisions would ensure transparency in the market.

They said the regulator had removed ambiguities that lurked in the draft report which would quell fears in the market.

On Thursday, the sensex rose 258 points at 18,770.89. The pundits expect the stock markets to maintain the upward momentum in the short term.

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