The Securities & Exchange Board of India (Sebi) is expected to review restrictions on the issue of participatory notes by FIIs at its board meeting scheduled for Wednesday. This is considered significant, as both the government and the markets regulator have so far stonewalled all requests for such a review. Sebi is also expected to decide shortly on making the current Securities Lending & Borrowing (SLB) Scheme more market friendly.
?Sebi has a lot of data and experience on P-notes now, which it will use to revisit the issue,? a government official said. A final decision on the subject may, however, take some time. ?You don?t expect the first review meeting to relax curbs,? he pointed out. The securities market will keenly watch the board meeting on Wednesday.
This will be the first review of the P-note curbs?including the ban on FIIs and their sub-accounts from issuing or renewing P-notes?imposed by Sebi in October 2007. P-notes are derivative products with shares or derivatives as underlying, issued by FIIs to overseas clients who cannot invest directly in India.
Apart from transparency concerns, P-notes were also restricted in a bid to moderate capital inflows that were booming at the time. That is no longer a problem. Compared with last calendar year?s net inflows of $17 billion, 2008 has seen net capital outflows of $6.4 billion so far.
Given that reversal, FIIs had asked the finance ministry to consider easing the restrictions, which had adversely affected their investments into India. The ministry had requested Sebi to assess the impact of those regulations and consider a review, especially since derivatives-on-derivatives are insignificant from the capital inflows point of view. Sebi had sought feedback from market intermediaries and FIIs.
The proposal to review the SLB Scheme, meanwhile, is aimed at making it popular among all sections of investors, and bring to a halt activities outside its ambit. The scheme was reintroduced earlier this year after a gap of 11 years.
A senior Sebi official told FE, ?What we are going to do is not product tweaking. We are undertaking a process review with the sole intention that volumes under the scheme should pick up. In this process, we need to take the players involved into confidence. This includes depositories, approved intermediaries undertaking the business and stock exchanges.?
Among the changes expected are an extension of the trading window under SLB from the present one hour, extension of the contract from the present seven days to a month, expanding the list of securities eligible under the scheme and asking stock exchanges to make margins for the scheme more realistic.
Sebi sources tracking the development said the ministry of finance is also closely monitoring the situation. The SLB scheme rolled out in April set certain conditions that were seen as tough. The tenure of lending/borrowing was fixed as standardised contracts. To start with, contracts with tenure of seven trading days may be introduced, Sebi said.
This apart, stock exchanges played their own role to discourage participants by imposing various types of margins at higher rates. Market players said the SLB product attracted five different kinds of margins, sometimes as high as 100%.