The Telegraph
Since 1st March, 1999
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Regulator sticks to P-note deadline

Mumbai, Oct. 22: Capital market regulator M. Damodaran today informed foreign institutional investors (FIIs) during a one-hour conference call that the 18-month time limit set for winding down participatory notes (P-notes) issued by their sub-accounts would not be relaxed.

The Sebi chairman said the proprietary sub-accounts would be allowed to register as full-fledged FIIs and would have to pay only the difference in registration charges for the change in status.

He said foreign investors who believed in the Indian growth story but were chary of registering with the regulator should “come to us directly through the front door”.

Last week, Sebi stunned the markets by stating its resolve to clamp down on P-notes — instruments that derive their value from underlying tradeable securities.

It floated a discussion paper in which it suggested that sub-accounts of FIIs should stop issuing offshore derivative instruments like P-notes with immediate effect and that they should wind up their current positions over 18 months.

The move triggered a bout of panic selling by the FIIs and saw the sensex skidding 1438 points since last Tuesday’s announcement.

Damodaran said Sebi would speed up the process of registration and examine the possibility of creating new categories of registered investors.

He said many investors felt there was no special merit in registering as FIIs and they could continue to operate as they have done till now through sub-accounts.

“That scenario is in the process of undergoing a change,” he said, adding that sub-accounts purely for P-note trading would not be allowed.

Damodaran said the sub-accounts that wanted to register could inform Sebi within the next 24 hours and send in their applications within a week. They could continue to operate as sub-accounts till they received their registration as FIIs.

He added that a single group could register as multiple entities.

The market watchdog has been trying to persuade FIIs to register with it but Damodaran admitted that the response had been lukewarm.

Many FIIs have proprietary sub-accounts which invest their own money. Such accounts are different from other sub-accounts which are formed in other countries by unregistered investors. Sources said Sebi was not keen on encouraging such sub-accounts.

The Sebi board will meet on October 25 to finalise the recommendations that were released last week.

The Sebi chairman indicated that he was unlikely to extend the 18-month time limit provided for FIIs.

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