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Mumbai/Delhi, Oct. 6 Even though the market watchdog SEBI, has removed restrictions on issue of Participatory Notes by FIIs, marketmen feel that during such bearish times measures such as this may not bring in funds.

The markets regulator has lifted 40 per cent P-Notes limit (of total assets) and also permitted the issuance of P-Notes with derivatives as underlying assets.

The Sensex today dropped a whopping 724 points due to global conditions to a two-year low of 11801.7.

In October last year, to curb capital inflows, SEBI had restricted issuing of P-Notes. This was announced in the evening of October 17, on that day the Sensex fell by 336 points and the next day, by more than 700 points.

“These restrictions did frustrate several hedge funds as they could not even sell shares as it would have reduced their India exposure as they could not make fresh purchases due to the restrictions. However, many of these funds managed to register themselves directly with SEBI as shown by several new registrations granted in the last one year,” said Mr Sunil Gidwani, Executive Director, PricewaterhouseCoopers.

“The year-old restrictions had invited a lot of criticism. SEBI’s proposal to do away with the restrictions on issue of P-Notes is definitely a welcome change. It would be not only welcome by the FIIs and offshore hedge funds but would also provide a big relief to investors in the current falling market caused by global turmoil. Of course, one has to wait and see the fine print to see how the changes are actually carried out when SEBI amends the FII regulations,” Mr Gidwani added.

“A significant part of FII selling in India in the current year was on account of PN-related restrictions. The new SEBI move is definitely positive for the market as it will help halt forced selling by FIIs to unwind PNs. However, such a step at this juncture is not expected to attract fresh FII flows into Indian market due to global liquidity crunch,” said Mr C.J. George, Managing Director of Geojit Financial Services.

The impact of these measures will be seen only gradually, said Mr Sanjay Someshwar, a sub-broker with Ventura Securities. “Once the markets stabilise and the confidence is back then the impact of these measures will be felt. As of now the appetite of the FIIs to invest is rather low,” he said.

The FIIs have practically stopped buying this year and in the past months if you see they have been shuffling the P- notes, transferring one stock from one FII to another, there was no actual selling happening, said Mr Prashant Bhansali, Director, Mehta Equities. “But now there is actual selling taking place, as there are now buyers for the large chunks that the FIIs are selling,” he added.

“The removal of the restrictions imposed on P-Notes would have a positive effect in the long-term and as the general sentiment turns positive the impact of the removal of restrictions on P-Notes would be positive on the market. This decision also means that slowly third party investments will start trickling into India,” said Mr. Anmol Sekhri, Fund Manager, Bonanza Portfolio

Since the announcement of the ban in October 2007, FIIs have been net sellers of equities for Rs 41,046.6 crore.

More Stories on : Foreign Institutional Investors | Regulatory Bodies & Rulings

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