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Foreign investors on tenterhooks over PNs

business Updated: Oct 18, 2007 23:51 IST
Arun Kumar
Arun Kumar
Hindustan Times
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Foreign fund managers continue to be jittery as the proposed move to moderate the role of participatory notes (PNs) could taper the flow of funds, which in turn would adversely affect the price.

A major reason for this nervousness in the market is the requirement of mandatory disclosure in case hedge funds opt for registration as foreign institutions investors (FIIs). As per conservative estimates, the current value of PN holding in Indian equities is estimated to be in excess of $50 billion.

“Majority of these hedge funds are unlikely to adopt the FIIs route because of the non-disclosure clause with their respective investors,” a senior fund manager with a leading FII said.

Hedge funds usually raise money from the long-term institutional investors and assure them a certain rate of return. “Many investors of these hedge funds officially cannot invest in the emerging markets as it requires a plethora of approvals from their respective boards or trustees. To circumvent the process, they opt the hedge funds route, which in turn invest through PNs,” another fund manager said.

A senior fund manager of a leading hedge fund said there are legal issues that prohibit them from registering in India. “Besides the country risk, we have to seek approval for every increase in exposure, which is a time consuming process and, many a times not permitted,” she added.

In an attempt to moderate the inflow of foreign funds, market regulator Securities and Exchange Board of India (SEBI) has proposed that FIIs cannot issue fresh PNs, in case the notional value of existing PNs is more than 40 per cent of the assets under command.

Since all the major players in the PN market have exceeded the limit, they cannot issue fresh PNs unless they cancel the existing ones. As a result, fresh inflow of foreign funds through PNs is unlikely to happen barring some exceptions. This may adversely affect the demand and therefore the sustaining the price at this level becomes more difficult, said the head of leading securities firms.

According to the CEO of another leading hedge funds, “Foreign funds from Japan, Taiwan and West Asia could start coming at a much faster pace then the current level.