The Hindu Business Line : ‘First good step in calibrating hot money’

Kolkata, Oct. 17 The market regulator’s proposed move on Tuesday to ban investments through participatory notes at the earliest and Wednesday’s clarification on rollover of existing positions taken up through such instruments in the derivative segment, had its corrective impact on the market in the first few minutes and its significant recovery later in the session.

However, opinions seem divided on the net effect of the move on the inflow – allegedly speculative or “hot” in nature – to the local equities from abroad, which has, of late, been exerting enormous pressure on RBI in managing day-to-day liquidity and maintenance of a steady valuation of the home currency against the greenback.

According to Mr Gul Teckchandani, an independent strategist and the former CIO of Sun F&C, it is the first good step in calibrating hot money and the resultant asset bubble.

He, however, felt that the regulator might be moving gradually towards allowing direct investments in Indian equities by overseas individual investors through the front door like any domestic investor.

“This is a difficult spot in an evolving process. Containing momentum and the flow from abroad is not an easy proposition, when 80 lakh jobs are at stake in the export sector because of appreciating rupee. Apart from returns, at global level, India now provides additional advantages on account of currency appreciation, interest arbitrage and leveraging opportunities.

The ban on overseas derivative instruments, for example, may find new speculative takers for the existing PNs at a premium in the next few months or the depository receipts of Indian companies may sky rocket as a result of drop in supply of Indian instruments”, he said.

There are around 300 applications for registration from overseas mutual funds, now pending with the SEBI. “Can these application be denied clearance on the plea that they have collected money from unknown investors abroad?” he asked.

Professor C.P. Chandrasekhar, who teaches Economics at the JNU, felt though SEBI finally seemed to have agreed with RBI on the PN issue in a climb down from its earlier position, the draft discussion paper along with today’s clarification give an impression of “deliberate vagueness” adopted by SEBI in addressing the supposed equity price manipulation through sheer force of liquidity.

“While the intent of the SEBI regulations (for overseas investments) was to prevent the entry of lightly regulated or unregulated entities into the Indian market, SEBI has for long chosen to ignore the misuse of such sub-accounts and PN route by such entities.

In the event, the SEBI regulations, which applied to domestic investors, did not apply to these foreign investors”, he added.

Mr V..K. Sharma of Anagram Stockbroking, considered the draft and the clarification make it free for all in issuing fresh PNs till Friday (deadline for response to discussion paper ends on Sunday).

“In fact, that led to the recovery today,” he opined.