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Our Bureau

Mumbai, Oct. 25

Thursday marked the end of issue and renewal of Participatory Notes with underlying derivatives by FIIs and their sub-accounts. SEBI’s draft proposals to this effect have been approved by the board of SEBI with immediate effect.

SEBI said it was also reverting to the FII regulations of 2004 which allowed only ‘regulated’ entities to invest in India through the PN route.

A later circular that had diluted this to allow “registered” entities to invest through PNs is no longer valid, said Mr M. Damodaran, Chairman of SEBI, at a news conference here.

A regulated entity is one that is subject to oversight in its home country by the concerned sectoral regulator, he added.

However SEBI is considering exempting unregulated entities such as Pension Funds, Foundations, Endowments, University Funds and Charitable trusts or societies. Because of their nature, they may be permitted to be registered as FIIs as a separate category of institutions without imposing the requirement of their being “regulated,” in their home countries, said Mr Damodaran.

Sub-accounts (both proprietary and corporate) may continue to issue PNs during the transitional phase while their letter of intent and applications with SEBI for FII status is pending. “This will hopefully not be for very long,” said Mr Damodaran.

Current positions through PNs underlying as derivatives will be wound up within 18 months.

Those entities with the notional value of their PNs constituting over 40 per cent of Assets Under Custody (AUC), shall make new issue of PNs only on redemption/cancellation/closing out of existing PNs of equivalent amount. And those with PNs of less than 40 per cent of their AUC are allowed only 5 per cent annual incremental issuance till they reach the 40 per cent ceiling.

The date for calculating AUC is September 30, 2007, the latest date for which monthly data provided by the custodians is available with SEBI, said Mr Damodaran. Only a handful of FIIs are above the 40 per cent PN limit, he remarked.

With a view to increasing the set of investors eligible for investment in India, the “broad based” criteria for fund will now be modified to include at least 20 investors (unchanged), with a single investor allowed to hold up to 49 per cent (against 10 per cent earlier).

Also, since new funds cannot have a track record, the requirement of one year’s track record will now pertain to the individual fund manager and not to the newly set up fund, he said.

“This is not the last set of regulations for foreign investors in India,” said Mr Damodaran. “Increased access to Indian markets, more products and cost competitiveness will determine the direction of the regulations, he said.

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