SEBI strikes the right note

18 Oct, 2007 The Economic Times

SEBI's move to impose some restrictions on PNs in order to 'moderate capital flows', as the FM described it, will have little lasting impact. There is a long-term flight of capital from the developed world, particularly the US, to India. India's lower PE compared to China and the fact that the rupee is allowed to rise, makes this country an attractive destination.

That said, the speed at which the Sensex was rising - the last 1,000 points took just four sessions - clearly spooked regulators and rupee appreciation caused by a tidal wave of capital, $8.5 billion since the September 19 Fed rate cut, was hurting exports. However, the execution could have been smoother.

SEBI issued a consultation paper on Tuesday evening which spooked the markets and the indices hit the lower circuit. Clarifications by SEBI, which could have come earlier, resulted in the Sensex ending only 336 points down. The regulator is justified in asking FIIs not to issue fresh overseas derivative instruments (largely PNs) where the underlying instrument is also a derivative. That is pure speculation and serves no broader purpose.

However, SEBI should tweak this proposal and exempt PNs where the underlying transaction is to capture arbitrage opportunities, for instance by buying in the cash segment and selling in futures. There appears to be little justification for banning issue of fresh PNs by FII sub-accounts. Restricting PNs issued by FIIs to 40% of assets under custody in India is a sensible move, though SEBI can review the percentage as and when the market cools down.

SEBI has been increasingly making it easier for investors to register as FIIs. It is important, however, to realise that many legitimate investors may not register because they are wealthy individuals, trusts or secretive hedge funds that are registered in the US as well. These entities will instead invest through brokers (the likes of Goldman Sachs or Morgan Stanley) registered as FIIs in India.

The FII issues PNs allowing their clients to capture the economic benefit of their investments. It's the job of the brokers (FII) to ensure they are not investing underworld money. It should be possible for investors, including individuals, anywhere in the world to invest in India through registered brokers.

This is the system followed in major markets and India should not be an exception. The concerns, bordering on paranoia, of some sections of the regulatory community, notably the RBI, is unjustified.

http://economictimes.indiatimes.com/Editorials/SEBI_strikes_the_right_note/articleshow/2468884.cms

With Thanks from THE ECONOMIC TIMES

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