The Hindu Business Line : Govt clearing decks for foreign hedge funds

THE Ministry of Finance and the Securities and Exchange Board of India (SEBI) are busy scratching the sheen off participatory notes (PNs) while they prepare to put up the welcome sign for foreign hedge funds to enter the Indian capital market in a big way.

Senior Finance Ministry officials said that easing of the registration norms for FIIs as promised by the Finance Minister, Mr P. Chidambaram, in his Budget speech would be aimed primarily to attract hedge funds to register directly with SEBI instead of routing their investment through PNs.

PNs are offshore derivative instruments in the form of contract notes issued by registered FIIs against underlying securities to overseas investors who wish to stay away for the registration hassles. This makes it possible for such funds to invest even as they stay away from the glare of the regulator.

"We want hedge funds to come and invest in our capital market directly. Why should the funds come through the PN route?" an official said.

A larger play of hedge funds is expected to bring in a huge amount of fresh liquidity into the capital market.

A recent SEBI report on the desirability of inviting hedge funds to register directly has pointed out that in the wake of a robust performance of the economy and a booming capital market, hedge funds in the country had reached record proportions during the first few months of the current fiscal with aggregate investments being in excess of $10 billion.

Though there is no single accepted definition of a hedge fund, such funds are generally unregistered private investment partnerships of high net worth individuals or funds or investment corporations which are not subjected to the regulatory requirements in their country of origin.

The more recent Vijay Kelkar Task Force on implementation of Fiscal Responsibility and Budget Management Act has characterised such funds as "structures where each customer brings in a minimum of (say) Rs 10 lakh of capital, so that the securities regulator ceases to work for investor protection and only focuses on contract enforcement and fraud."

Hedge funds are often criticised for their speculative nature with fears that sudden withdrawals create flutter in the markets. However, Finance Ministry officials felt that this was a mistaken notion and that such funds react more or less in the same manner as other participants in the market do to a given set of information.

The SEBI report also backs this view. Stating that "all hedge funds are not necessarily speculative funds", the report says that the Indian capital market regulatory framework has sufficient checks and balances "to keep the markets safe from potential abuse and manipulations." It has also suggested some additional checks to make the system more foolproof.

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