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Cap on PNs go; 15% stake in SEs okayed

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SummaryForeign investors withdrawing a net $9.5 billion from the Indian stock markets this year has made the Securities & Exchange Board of India remove the restrictions on the issue of participatory notes by foreign institutional investors, against securities, including derivatives as underlying.

Foreign investors withdrawing a net $9.5 billion from the Indian stock markets this year has made the Securities & Exchange Board of India remove the restrictions on the issue of participatory notes (PNs) by foreign institutional investors, against securities, including derivatives as underlying.

Speaking after the board meeting on Monday, Sebi chairman CB Bhave told reporters the board reviewed the FII investment regime. “We are restoring the pre-October 2007 position, when no cap existed,” said Bhave. He also said the framework governing the participation of FIIs in Indian securities markets needs a comprehensive review. “It has been decided to put out a detailed consultative paper on this for comments from the public”, he said. Expert committees have asked for relaxing the rules that govern FII presence in the Indian equity markets.

In October 2007, Sebi had decided to restrict issuance of PNs to 40% of the total assets held by an FII. They were also stopped from issuing fresh notes. FIIs Sebi had given them time till March 2009 to wind up their positions in PNs. This led to a sharp fall in the presence of overseas investors in Indian markets, creating a parallel market in Singapore and Dubai for Indian securities, but which, because of absence capital account convertibility, could not be traded in rupees. However, the number of FIIs since then has increased in Indian markets after a lag.

The Sebi relaxation follows the recent finance ministry decision to relax the rules for external commercial borrowings. Indian entities investing in infrastructure projects can now bring in up to $500 million automatically, that is, without prior information to RBI.

The latest move, reckon market experts, could stem the flow for a while. However, many FIIs have already unwound their positions and are below the 40% levels, said a key team member with an FII.

“There could be a positive reaction for a while as it just might spur a few to increase their positions. But with risk aversion on the rise, this looks difficult”, he adds.

Bhave also mentioned that the registration norms and that the ‘know your customer’ or KYC, norms would exist as they are at the moment. He mentioned that the FII registrations will be encouraged and the trend should continue. “Institutions will be monitored for adherence to KYC norms and those not complying will see their registrations being cancelled,” he added.

The Sebi board has also taken a decision to

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