Sunset clause for P-Notes
Is timing everything? While the market eyes the regulator's moves on Participatory Notes, the controversial instrument used by foreign institutional investors (FIIs) to play easily in the Indian market was already heading for an end in 2009, thanks to a 5-year-sunset clause that was part of the policy regime that allowed it in February 2004.
In other words, as the Securities and Exchange Board of India (SEBI) gets down to decide on the fate of P-Notes on Thursday, the timing of its concept paper that triggered see-saw market movements last week was only confirming what appears to be a calibrated strategy involving the Finance Ministry.
The 18-month frame proposed for P-Note players to formally register themselves coincides with the sunset phase, highly placed sources in the regulatory agency said. That runs counter to the widely held impressions that authorities moved either to stymie a rally in stocks or a strengthening of the rupee. But it could be that the regulators were subtly separating smart money players from those out to make a fast buck.
It is leant that the SEBI is planning to restrict participatory notes’ investment in the derivatives market particularly in futures trading. The regulator has proposed to wind up derivatives-based Participatory Notes in 18 months and curb these instruments based on assets managed by FIIs.
“The investment in derivatives market create an over-leveraged situation in the stock market," a SEBI source said. "The move is aimed at curbing the speculation in the market," the source said.
The 2004 regulation on FIIs by the then SEBI Chairman GN Bajpai had given five-year time-frame for the offshore derivative instruments including participatory notes, equity linked instruments and other such instruments backed by underlying listed equities. That appeared like a facilitating move to help easy entry, rather than legitimise the anonymity of investors behind a vague instrument.
The proposed move is aimed at alerting the overseas investors that they should get themselves registered as FIIs before the sunset clause expires while continuing to invest, the sources said. The SEBI board is meeting on Thursday in Mumbai to decide a regulation roadmap. Ominously, SEBI chairman M Damodaran met senior Finance Ministry officials to discuss its contours.
“I cannot guess what will happen tomorrow. The board will meet and will take a final decision," Damodaran said at a function in New Delhi.