What do you think of the practice of FIIs issuing participating notes in general?

The route was generally an inappropriate one to get long-term money into India. Back in 1991, when the foreign exchange crisis hit the Indian economy, the easiest way to get in more foreign exchange was to wave the magic wand of reforms and open the FII/Participatory Notes money. What India required was long-term stable inflows, which would fund the economic growth, and not the hot flows which would chase short-term returns and which will not hesitate to reverse. 70 per cent of the flows, which India got since reforms, were non-FDI ones. In most of the developing countries it’s the other way round, the FDI is opened first.

What is the route to investing that FIIs take in other emerging markets? Are there fewer restrictions there?

Other emerging markets in Asia have restrictions of varying degrees too. In China for example, a foreign institution cannot invest directly in the Chinese equity markets unless it is registered as a “Qualified Foreign Institution Investor” (QFII). Wherever the restrictions are higher, there exists an off-shore derivative markets, such as in China. Australia, Singapore, and Hong Kong are the most unrestricted markets in Asia. India may fall in one of the moderately restricted ones, which is in line with partial capital account convertibility policy.

Do you think the SEBI proposal on curbing P-Notes is good for the Indian markets?

This move will be good for the markets and the economy in the long run since speculative flows get reduced. After a rebalancing, markets will start focusing more on fundamentals rather than the flows (liquidity).

What kind of liquidity implications is likely through this move in the short-term, long-term?

The FIIs put together, on an average, comprise 30 per cent of the turnover in the stock markets (cash). It’s difficult to hazard a guess as to how much the Participatory Notes-driven share in it would be. Liquidity in Indian markets is interalia, often a function of absolute market levels. Whenever the market moves down sharply, liquidity dries up.

I don’t see any problems in liquidity if more and more domestic institutions are allowed to participate in Indian markets. Moreover, registered FIIs will contribute significantly here. If FIIs like the India growth story (and they will), there will be more registrations of new FIIs. The registered FIIs can still get money in. It’s like water on a downward slope, it will find its way to the destination.

More Stories on : Stock Markets | Interview | Mutual Funds

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page