The Hindu Business Line : Global hedge funds under home country regulation may get nod

AFTER the initial willingness shown by the Finance Ministry-Securities Exchange Board of India (SEBI) combine to tackle the might of global hedge funds, it is now time for adopting caution.

The participation by global hedge funds in the Indian market might finally be a very restricted one with the mood clearly swinging towards registering only those entities that can provide some evidence of falling under the regulatory framework of their country of origin.

"Any foreign fund that enters the Indian market has to be regulated in the home country. We will look for some traces of regulation while giving registration," a senior finance ministry official said.

This would effectively lead to an automatic disqualification of a large number of global hedge funds from registering with SEBI since, by their very nature, such funds are entities that are not regulated in their own countries.

In fact, a SEBI task force has itself pointed out that a major characteristic of such funds are that they are not subject to the regulatory regime in their place of incorporation or operation.

Unable to find a definition of `hedge funds' under any law, the panel had pointed out that these could loosely be termed as unregistered private investment partnerships, funds or pools that may invest and trade in different markets and are not subject to the regulatory requirement in their home country.

The task force also mentions the registration dilemma arising out of the unregulated nature of the hedge funds.

Thus, under the present foreign institutional investor (FII) regulations, hedge funds cannot approach SEBI for registration since the norms explicitly provide that only entities regulated into their place of incorporation or origin can be registered as FIIs.

On the other hand, though these funds can enter through the FII-sponsored sub-account route.

Such an entry has to be in a surreptitious manner since any mention of the fund having characteristics similar to `hedge fund' automatically results in the application being withheld.

The Government and SEBI have been trying to work out ways to allow hedge funds to register directly with the regulator instead of investing through the participatory note (PN) route.

PNs are offshore derivative instruments in the form of contract notes issued by registered FIIs against underlying securities to overseas investors.

The PN route allows foreign funds to flow in without the actual overseas investor showing up in SEBI's regulatory radar.

It has been estimated by a SEBI task force on hedge funds that investment by such funds through the PN route this fiscal has reached all time high levels this fiscal with several billion dollars of funds flowing in.

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