The Hindu Business Line : SEBI may ease restrictions on P-Notes

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SEBI may ease restrictions on P-Notes

Review prompted by tight liquidity.

Our Bureau

Mumbai, Oct. 5 The board of Securities and Exchange Board of India, which is scheduled to meet on Monday, is likely to ease the current restrictions on investments by foreign institutional investors (FIIs) through Participatory Notes.

P-Notes are offshore derivative instruments used by FIIs to buy shares in Indian stock markets without disclosing the identity of the actual investors.

Clampdown in 2007

A year ago, in October 2007, SEBI had banned fresh issue of P-Notes by FIIs as a measure to check the massive flow of foreign funds into the Indian stock markets.

The huge inflows had led to ‘overheating’ of the markets at that time, making it difficult for the financial market regulators to handle the excess liquidity.

Regulators were unhappy as they thought hedge funds investing through P-Notes could create havoc in the market.

Changed scenario

But now the situation has reversed and the market is famished for funds. This, sources said, has prompted SEBI to have a re-look at the October 2007 decisions.

According to the sources, the capital market regulator may lift the existing ban on fresh issue of P-Notes in the light of the tight liquidity conditions prevailing in the market.

Flight of capital

There has been a massive flight of capital from the domestic markets following the turmoil in the global financial markets.

FIIs continue to be net sellers in the Indian equities markets, having sold more than $9 billion worth shares in the past nine months. India’s forex kitty got lighter by $4 billion in the last one month.

The fall of the Sensex, which began early this year as a fall-out of the US sub-prime crisis, took a severe beating after the recent Wall Street disaster.

Market mood

The SEBI move to ease the curbs on P-Notes, sources said, is intended to shore up market sentiments and help bring in fresh liquidity.

The recent meeting of the high level coordination committee on financial markets also reviewed the current restriction on issue of P-Notes. It was felt at the meeting that lifting of the curbs on P-Notes and enhancing the FII investment limits in the debt market could improve the current liquidity crunch.

However, the Reserve Bank of India, which is a prominent member in the committee, has always been against allowing foreign investments through P-Note route.