Foreign institutional investors (FIIs) have expressed their views that if measures proposed by the Securities and Exchange Board of India (Sebi) to curb the inflows from foreign players are implemented in its proposed form without any dilution, it will negatively impact foreign inflows in the next three to six months.
Citigroup Global Markets in a report released on Thursday said, “The proposed measures can have a very significant negative impact near-term on foreign inflows into Indian equities. There has been a significant rise in the share of participatory notes (PNs) in overall FII flows into Indian equities.? The report was released by Citigroup’s India research head Ratnesh Kumar.
Users of PNs are largely hedge funds; a fast-growing asset class globally in recent years and lack of any new issuance of Offshore Derivative Instruments(ODIs) with underlying derivatives, would take away hedging options for exposures in the cash market. This could be a deterrent for new hedge fund inflows, the report said.
In a similar tone, CLSA; another FII, in its report, had mentioned on Wednesday that their interpretation of the proposals suggests that if these measures are implemented in toto, a substantial chunk of holdings of Indian equities through PNs will need to be wound down over an 18 month period. Sebi’s own figures reveal the aggregate outstanding positions in P-Notes to be a substantial Rs 3.53 lakh crore ($ 88bn, of which $29bn in derivatives) as of August ?07, a 11x jump since March ?04 and significant in the context of $220 billion stock ownership by FIIs at that point of time. A forced selling of this magnitude would have a substantial negative impact on the market in the short-term and the expectation of continued selling would remain a technical overhang on the market, until virtually all existing positions are unwound.
Finance Minister P Chidambaram, on Wednesday, said that the proposals with or without some modifications would be made a regulation by October 25. The proposals also include that the additional PNs issuance through sub-accounts would be stopped with immediate effect and current positions need to be wound up in 18 months.
“While we do not have an estimate on the percentage of PNs that are through sub-accounts, it could be a meaningful number and result in selling pressure over this period, to the extent of those investors not being able to get the FII registration,” Kumar said.
