Board of India (Sebi), on Thursday, confirmed that, in a bid to dam overseas investment in shares following record inflows, it was implementing restrictions on indirect investment instruments popularly known as ‘Participatory Notes (PN)’ used by foreign investors into India.
Briefing reporters, Chairman M Damodaran, said overseas funds will have to register in India before investing in securities linked to equities or sell their holdings within 18 months.
No further issuance
The regulations on P-Notes became effective from close of trade on Thursday (October 25, 2007). The reference date for calculating assets under custody (AUC) for P-notes would be September 30 this year.
The market regulator also announced that some of the sub accounts that applied for registration have been cleared. The Sebi Board has also decided that further issuance of P-notes by sub accounts of FIIs to be discontinued with immediate effect. Pension funds, charity and endowments can also be registered as FIIs.
Wind up the position
In derivatives, Foreign Institutional Investors (FIIs) and their sub-accounts cannot issue fresh P-notes and will have to wind up their current position in 18 months, he said. In spot market, FIIs will not be allowed to issue P-notes more than 40 percent of their assets under custody.
Those who have issued P-notes of more than 40 percent of their assets, could issue such instruments only if they cancel, redeem, or close their existing PNS.
Replying to a question, Mr Damodaran said only the “handful” of funds over the threshold will have to freeze their holdings. According to Mr Damodaran, brokers who have issued less than the limit may increase at an incremental rate of 5 per cent of their assets under custody.
Offshore derivatives, known as participatory notes, rose 11-fold to Rs 3.54 trillion ($89 billion) in 3 1/2 years, Sebi said on October 16.
These accounted for 52 per cent of foreign brokers’ assets under custody.
Track record for enrolment
There have been issues faced regarding the provision of track record of the applicant. Without doing away with the provision, we now say that a fund manager of an entity would be required to have a track record of one year and not the newly constituted entity.
