The Securities and Exchange Board of India is reviewing the registration norms for foreign institutional investors, in a move to encourage direct entry by hedge funds.
Hedge funds still prefer investments through the participatory note route because of the high transaction costs after registration as an FII.
The review of the norms will be aimed at reducing the costs and relaxing the procedures for FII registration. Sebi Chairman M Damodaran has been saying that hedge funds should register themselves as FIIs and invest directly in the market.
PNs are derivative instruments whose underlying securities are Indian stocks and are issued by FIIs to overseas investors that want to invest in Indian stocks but are not allowed to do so.
PNs also give investors the benefit of anonymity, giving rise to concerns about whether Indian money itself is coming back through the PN route. The sources of such funds have been an issue with Indian regulators.
The idea behind easier registration is to ensure that investment comes through sub-accounts that are easier to track.
The Sebi board, at its meeting on Wednesday, had preliminary discussions on the issue and a final decision is expected at the next board meeting scheduled for August 22.
Representatives of the Reserve Bank of India, however, wanted Sebi to substantiate the view on hedge funds with more data. The central bank had been advocating a ban on the PN route as it is uncomfortable with the source of such funds.
The new registration norms will have strict disclosure requirements under which PN issuing FIIs will be required to know the original purchaser or holder of the PN.
They will also ensure that the PN holder is not a non-resident Indian, person of Indian origin, nor a mutual fund which has Indian investors. This is primarily aimed at prohibiting round tripping of funds by Indian investors for saving taxes.
The value of PNs grew 70 per cent in just one year between January 2006 and January 2007, accounting for over one-third of the total foreign portfolio investments in the Indian stock markets, according to government estimates.
The board also discussed various initiatives taken by Sebi for developing the corporate debt market, like starting the reporting and trading platform. It is in the process of preparing the guidelines for primary issuance of corporate bonds.