The US sub-prime crisis appears to have had little impact on the entry of hedge funds in India with the government still keen on attracting quality inflows into the economy. The government as also regulators are of the view that although there is a need to monitor the quality of money pumped in by the hedge funds, there is no need for restriction on such investments. The issue of monitoring such inflows has been discussed at the highest level involving officials from the finance ministry, the Securities and Exchange Board of India and the RBI.
?The business of hedge funds has a wide-ranging impact on the entire economy. So some regulation is called for. However, it will not be aimed at restricting inflows but at ensuring their quality,? an official involved in the policy formulation told FE.
The central bank, too, recently raised concerns about the quality of money invested by hedge fund route, globally. ?Rapid growth in the hedge fund activity is a cause of concern among the regulators as these funds are largely unregulated and are governed by opaque investment partnerships,? RBI stated in its 2007-08 first quarter review document titled Macroeconomic and Monetary Developments released last month.
Now, regulators and the government feel adequate checks should be put in place to continuously monitor the money coming in via the hedge fund route. Hedge funds invest in India through various channels, such as external commercial borrowings, foreign currency convertible bonds and participatory notes (PNs) issued by foreign instituional investors (FIIs). The PN route is most often used by the hedge funds. SEBI has recently indicated that hedge funds can invest under the FII category as well.
While government data shows that PNs account for 35% of the FII inflows, there are no separate figures published for hedge funds. By end July, FIIs invested Rs 42,954.20 crore ($10.2 billion) in India. But the participation of hedge funds till date has been rather miniscule here. ?India has very small exposure to hedge funds. However, their participation would surely increase driven by expectations of attractive returns in an economy growing at more than 9%,? said Punjab National Bank?s GM (treasury and finance) Arun Kaul.
Analysts also note that the regulators may be taking a futuristic view for attracting money via hedge funds through a transparent channel. ?The government?s intention appears to be that we should not have open-ended conduits through which bad quality funds flow into India,? said PricewaterhouseCoopers executive director Sanjay Hedge.