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Sebi open to hedge funds, seeks FII rule book compliance

business Updated: Sep 16, 2007 23:22 IST

The Securities and Exchange Board of India (Sebi) has said that hedge funds were welcome to invest in India, provided they complied with the existing regulations for foreign institutional investors (FIIs).

“Why should we be worried about hedge funds... We are not making any separate set of regulations for them... They have been investing in India through participatory notes. All we are telling them is if you want to come here, come through the front door,” Sebi Chairman M Damodaran said.

“Hedge funds began as a normal class of investors. With time, they became large with more and more investors putting their money in these funds,” Damodaran said.

Hedge funds are generally speculative funds managing money for private investors. Mostly prevalent in developed markets like the US, these funds are generally used by wealthy individuals and institutions. Hedge funds adopt aggressive investment strategies and are exempt from rules and regulations governing other mutual funds provided the number of investors is not more than 100.

“In FII regulations Act of 2004, hedge funds were not named as a separate class and no specific provisions were made for them... There were no separate regulations for them anywhere in the world,” Damodaran said, replying to a query on whether hedge funds should be considered a different class.

“Now they want to come to India and we are telling them to go through the FII regulations and if they comply, we will consider their application on the basis of of merit,” he added.

Asserting that Sebi is not making separate regulations for registration of hedge funds, Damodaran said, “We are not even looking at whether they are a hedge fund or not.” “Indian economy is on a roll and the stock market is growing. Any savvy investor would want to invest where good returns are available,” the Sebi chief said on the strong demand shown by hedge funds in Indian equities.

Meanwhile, referring to the issue of short-selling, Damodaran said rules for short-selling would be announced “very soon”.

“We are ready for it (short-selling) now... There is no hiccup and the regulations are coming very soon,” Damodaran said.

Short-selling means borrowing a security from a broker and selling it with the understanding that it must be later bought back and returned to the broker. This is used by investors looking to profit from falling price of stock.