The bible says, “The penitent sinner shall pass through”: A lesson, which our policy makers should take to heart. I hope our policy makers and regulators are big enough to admit a mistake and make amends. Like the FM did with the ill conceived cement excise duty in the Union Budget. Even if there is no ‘roll back’ to the SEBI draft on P Notes, a substantial modification is urgently required.
From the violent reaction of the market, policy makers should have little doubt on what investors think about this proposed move. While the stock market does not necessarily influence the hand of policy making in India, I think we have reached a stage where it cannot be ignored altogether. Suggestions have started pouring in on the Sebi draft and a few changes need to be made.
First, the 40 per cent assets under custody (AUC) definition needs to be laid out as that is the Plimsoll Line. The exact time frame used to calculate this 40 per cent. Proprietary sub accounts of FIIs need to be eliminated from the ambit of this restriction, as it is not an ‘anonymous’ entity but the FII itself, albeit through another jurisdiction. P Note holders of cash stocks should be allowed to hedge their positions, against their cash holdings, regardless of any limits. There needs to be a visible and significant attempt to ‘actually’ get as many hedge funds registered here as possible. Not lip service but a real attempt to convert most of these funds into registered entities by making disclosure and registration norms less onerous.
Eventually we need to scrap this FII registration business; with suitable disclosures, people should be able to start trading overnight. Instead of virtually terminating the PN product on the 25th, if a sunset window of a few months is allowed, nothing like it. That however, would result in a continued deluge of inflows that the Finance Ministry is expressly trying to curb. There are several other micro adjustments that are required, too long to list here.
The problem is that all suggestions on the draft have one simple objective: Don’t rock the boat, let life carry on and let the transition happen over time. This objective is at direct loggerheads with the Finance Ministry’s objective of stemming the rupee’s appreciation immediately. The FM too is trying to buy time.
The final shape of the draft depends on how much the policy makers are rattled by the market reaction and global investor feedback versus the extent of their desperation on the rupee.