The Indian equity market might have shed some points on Wednesday in an impulsive reaction to the Securities and Exchange Board of India (Sebi) proposals to restrict issuance of participatory notes (PNs), but fund managers say for the long-term story, the proposed move is in the right direction.
The objective of the measures is to encourage investors to invest into the Indian equity markets directly through the Foreign Institutional Investors (FIIs) route by registering through the Sebi rather than through the back door, they say.
?We judge that the measures are unlikely to have a large impact in the medium term and that the trend over the medium term will continue in the direction of capital account liberalisation,? said Sonal Verman, Economist, Lehman Brothers. ?The objective of the Sebi measures is to encourage investors to invest into the Indian equity markets directly through the FII route by registering through the Sebi rather than through the back route,? she said.
However, if implemented in its current form, which was likely in this case, the measures were likely to have a negative impact on the equity markets in the short term, she added.
Tata Mutual Fund MD Ved Prakash Chaturvedi said the move by the regulator was a natural evolution process for the Indian market. ?We are moving in the right direction to be a more matured market. Next, leveraging in the PN market needs to be more liberated. Investors need not worry over short-term blips as India?s economy will continue to grow backed by strong corporate profits, rising productivity and higher investments. The structural changes will enable more transparency in the market, and will continue to drive FIIs into India in the medium term.?
CLSA Asia Pacific Markets, a leading FII in the market, in their analysis of the PN issue avers,?In our view, there could be also be an adverse impact on longer-term sentiment towards investing in India, if such harsh measures are implemented in their entirety. The experience of Malaysia, which had seen indifferent stock market performance and depressed trading volume for much of the period following imposition of capital controls in Sep-98 does provide some perspective on this.?
Late on Tuesday night, the market watchdog released a discussion paper, which proposes to tighten regulations for purchase of shares and bonds through the PN route.