18 October, 2007

PN traffic runs into SEBI red light

17 Oct, 2007 The Economic Times

MUMBAI: Amid a deluge of foreign money that drove the market too high too fast, Sebi has proposed restrictions on participatory note (PN)—an offshore derivative instrument (ODI) used by foreign investors to play the Indian stock market. These are investors who are either not willing to get registered with Sebi or are barred from doing so.

In a note issued late Tuesday, the capital market regulator has suggested that PNs should not be issued to these overseas investors for trading in Indian equity derivatives like Nifty futures. PNs are issued by foreign institutional investors (FIIs) and their sub-accounts for investing in stocks as well as derivatives. Significantly, Sebi has also proposed certain limits on PN issuance for buying stocks in the spot market.

As derivatives allow an investor to take positions by paying a slice of the total exposure , a rush of foreign money in this segment could make the market unstable . According to the Sebi note, “FIIs and their sub-accounts shall not issue/renew ODIs with underlying as derivatives with immediate effect. They are required to wind up the current position over 18 months, during which period Sebi will review the position from time to time.” The proposal will be considered by the Sebi board on October 25.

Sebi has also proposed that there should be no further issuance of ODIs by sub-accounts of FIIs. Sub-accounts are corporate or special purpose vehicles floated by foreign funds in which they manage money on behalf of overseas clients. Significantly, even PNs issued to buy stocks (and not derivatives) will have restrictions.

Sebi has proposed if the notional value of PNs outstanding (excluding derivatives) is less than 40% of the FII’s total assets under custody in India, then it can issue further ODIs at the incremental rate of 5% till the 40% limit is reached. However, such ODIs would be for cash market purchase and not derivatives.

According to market circles, recent months have seen huge bets being placed on the Nifty by unregistered foreign investors . In these bets, where the structures are more complex than ordinary Pns, the holder of the instrument is promised returns linked to the Nifty. For instance, the holder of the ODI may be entitled to a return of 10% on his investment if the Nifty moves up by 5%.

http://economictimes.indiatimes.com/Analysis/PN_traffic_runs_into_SEBI_red_light/articleshow/2465609.cms


With the Thanks from The Economic Times

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