The Hindu Business Line : Curbs on P-notes lifted

Mr C.B. Bhave (right), Chairman of the Securities and Exchange Board of India, and Mr T.C. Nair, Whole Time Member, at a press conference in Mumbai on Monday. – Paul Noronha

Our Bureau

Mumbai, Oct.6 The SEBI board on Monday lifted the October 2007 restrictions on issue of participatory notes by foreign institutional investors with immediate effect, a move widely perceived to bring in more funds to lift the sagging capital markets.

FIIs can issue P-Notes against securities, including derivatives, as underlying assets. The P-Note limit of 40 per cent of an FII’s total assets under custody has also been done away with.

The undoing of SEBI’s earlier restrictions were made “given today’s context,” Mr C.B. Bhave, Chairman of SEBI, said at a news conference today. However, he did not explain precisely the rationale behind today’s announcement, though some marketmen perceived this as a move to enhance liquidity in the market.

FII net inflows in equity in calendar 2007 amounted to $17 billion; this copious inflow created concerns for the regulators. FII year-to-date outflows for the current year are more than $9 billion, causing concerns of liquidity.

“We have gone to the pre-October 2007 position; the real long-term decision is to review the entire FII structure,” said Mr Bhave. A detailed consultative paper on this would be issued by SEBI later, he said.

Offshore Derivative Instruments (ODIs), popularly known as P-notes are issued by FIIs to foreign individuals who do not want to participate in the Indian securities market directly.

In October last year, SEBI had restricted FIIs and their sub-accounts from issuing/renewing ODIs with underlying as derivatives with immediate effect and they were required to wind up their current positions over 18 months. P-notes could also not exceed 40 per cent limit of an FII’s assets under management.

In another move, the SEBI board decided to enhance the stakes owned in recognised bourses by six categories of shareholders from the existing 5 per cent to 15 per cent. These categories are public financial institutions, stock exchanges, depositories, clearing corporations, banks and insurance companies.