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Sebi could ease stand against p-notes in derivatives

The regulator may not stick to pure definition of hedging; may allow cross-sectoral hedging

Pavan Burugula  |  Mumbai 

Sebi

The Securities and Exchange Board of India (Sebi) is likely to take a less stringent approach in banning participatory notes (p-notes) from the market.

According to sources, the regulator may not stick to the pure definition of and allow cross-sectoral bets as strategy.

Last month, had proposed to ban from taking naked positions in the segment. This means a p-note investor will be allowed to deal in the counter of a stock, say Reliance Industries, only if the investor owns the underlying stock in the cash segment. 

The proposal faced opposition from foreign investors, who made representations to the regulator expressing concerns about the move. The regulator is likely to take a final call on p-note tightening at its board meeting on Wednesday.

Sources say may give more leeway when it comes to deciding what construes  

For instance, an investor with exposure to high-beta banking stocks can be allowed to go short on defensive bets such as consumer goods or technology.

Although typically means going long and short on the same stock or sector, some investors use advanced strategies for minimising risks. 

"Numerous industry bodies, including (foreign institutional investor) lobbies, have expressed concerns about imposing a blanket ban on naked positions. They have explained cross-sectoral hedges are a prominent part of strategies of investors globally to minimise risk and hence the regulator should give some leeway. has assured it will consider the issue," said a source privy to the development.

However, the regulator is unlikely to give any relaxations when it comes to cross-country In this strategy, investors buy shares of a country to minimise the risk that could arise due to their exposure to a different country. For instance, investors who are long on China could go short on India for

This proposal was floated by to curb speculative trading, which could increase volatility in the had floated a discussion paper on last month which also included the proposal to levy $1,000 as fees on each offshore derivative instrument (ODI) subscriber.

The Alternative Investment Management Association (Aima), the global representative of the hedge fund industry, has written to saying its proposals could kill the liquidity in the Indian

“We are concerned that Sebi’s proposal would negatively impact the ODI futures market and have unintended consequences for Indian capital In particular, we envisage that a number of key informed investors would leave the market and this will reduce liquidity and affect accurate price formation,” said Aima in the letter.

The organisation added that as an instrument should not be discouraged by as it would be unviable for each and every portfolio manager to comply with the full foreign portfolio investor (FPI) regime in all circumstances in which an exposure to an Indian futures contract is sought.

Another global investor lobby, Asia Securities Industry and Financial Association (Asifma), too is said to have written to on the issue. 

The weightage of has come down drastically in the last decade due to tightening of rules and increasing compliance. The proportion of to total FPI investments had come down to 6 per cent in April, compared to nearly 50 per cent a decade ago.

"have been impacted largely by two factors. The compliance burden has increased significantly on the p-note subscribers. On the other hand, FPI registration process has been simplified to a large extent making direct participation easier. However, the instruments are unlikely to phase out as investors who prefer taking small exposure to the country will still prefer over direct participation," said Sudhir Bassi, partner, Khaitan & Co. 

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Sebi could ease stand against p-notes in derivatives

The regulator may not stick to pure definition of hedging; may allow cross-sectoral hedging

The regulator may not stick to pure definition of hedging; may allow cross-sectoral hedging
The Securities and Exchange Board of India (Sebi) is likely to take a less stringent approach in banning participatory notes (p-notes) from the market.

According to sources, the regulator may not stick to the pure definition of and allow cross-sectoral bets as strategy.

Last month, had proposed to ban from taking naked positions in the segment. This means a p-note investor will be allowed to deal in the counter of a stock, say Reliance Industries, only if the investor owns the underlying stock in the cash segment. 

The proposal faced opposition from foreign investors, who made representations to the regulator expressing concerns about the move. The regulator is likely to take a final call on p-note tightening at its board meeting on Wednesday.

Sources say may give more leeway when it comes to deciding what construes  

For instance, an investor with exposure to high-beta banking stocks can be allowed to go short on defensive bets such as consumer goods or technology.

Although typically means going long and short on the same stock or sector, some investors use advanced strategies for minimising risks. 

"Numerous industry bodies, including (foreign institutional investor) lobbies, have expressed concerns about imposing a blanket ban on naked positions. They have explained cross-sectoral hedges are a prominent part of strategies of investors globally to minimise risk and hence the regulator should give some leeway. has assured it will consider the issue," said a source privy to the development.

However, the regulator is unlikely to give any relaxations when it comes to cross-country In this strategy, investors buy shares of a country to minimise the risk that could arise due to their exposure to a different country. For instance, investors who are long on China could go short on India for

This proposal was floated by to curb speculative trading, which could increase volatility in the had floated a discussion paper on last month which also included the proposal to levy $1,000 as fees on each offshore derivative instrument (ODI) subscriber.

The Alternative Investment Management Association (Aima), the global representative of the hedge fund industry, has written to saying its proposals could kill the liquidity in the Indian

“We are concerned that Sebi’s proposal would negatively impact the ODI futures market and have unintended consequences for Indian capital In particular, we envisage that a number of key informed investors would leave the market and this will reduce liquidity and affect accurate price formation,” said Aima in the letter.

The organisation added that as an instrument should not be discouraged by as it would be unviable for each and every portfolio manager to comply with the full foreign portfolio investor (FPI) regime in all circumstances in which an exposure to an Indian futures contract is sought.

Another global investor lobby, Asia Securities Industry and Financial Association (Asifma), too is said to have written to on the issue. 

The weightage of has come down drastically in the last decade due to tightening of rules and increasing compliance. The proportion of to total FPI investments had come down to 6 per cent in April, compared to nearly 50 per cent a decade ago.

"have been impacted largely by two factors. The compliance burden has increased significantly on the p-note subscribers. On the other hand, FPI registration process has been simplified to a large extent making direct participation easier. However, the instruments are unlikely to phase out as investors who prefer taking small exposure to the country will still prefer over direct participation," said Sudhir Bassi, partner, Khaitan & Co. 
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Business Standard
177 22

Sebi could ease stand against p-notes in derivatives

The regulator may not stick to pure definition of hedging; may allow cross-sectoral hedging

The Securities and Exchange Board of India (Sebi) is likely to take a less stringent approach in banning participatory notes (p-notes) from the market.

According to sources, the regulator may not stick to the pure definition of and allow cross-sectoral bets as strategy.

Last month, had proposed to ban from taking naked positions in the segment. This means a p-note investor will be allowed to deal in the counter of a stock, say Reliance Industries, only if the investor owns the underlying stock in the cash segment. 

The proposal faced opposition from foreign investors, who made representations to the regulator expressing concerns about the move. The regulator is likely to take a final call on p-note tightening at its board meeting on Wednesday.

Sources say may give more leeway when it comes to deciding what construes  

For instance, an investor with exposure to high-beta banking stocks can be allowed to go short on defensive bets such as consumer goods or technology.

Although typically means going long and short on the same stock or sector, some investors use advanced strategies for minimising risks. 

"Numerous industry bodies, including (foreign institutional investor) lobbies, have expressed concerns about imposing a blanket ban on naked positions. They have explained cross-sectoral hedges are a prominent part of strategies of investors globally to minimise risk and hence the regulator should give some leeway. has assured it will consider the issue," said a source privy to the development.

However, the regulator is unlikely to give any relaxations when it comes to cross-country In this strategy, investors buy shares of a country to minimise the risk that could arise due to their exposure to a different country. For instance, investors who are long on China could go short on India for

This proposal was floated by to curb speculative trading, which could increase volatility in the had floated a discussion paper on last month which also included the proposal to levy $1,000 as fees on each offshore derivative instrument (ODI) subscriber.

The Alternative Investment Management Association (Aima), the global representative of the hedge fund industry, has written to saying its proposals could kill the liquidity in the Indian

“We are concerned that Sebi’s proposal would negatively impact the ODI futures market and have unintended consequences for Indian capital In particular, we envisage that a number of key informed investors would leave the market and this will reduce liquidity and affect accurate price formation,” said Aima in the letter.

The organisation added that as an instrument should not be discouraged by as it would be unviable for each and every portfolio manager to comply with the full foreign portfolio investor (FPI) regime in all circumstances in which an exposure to an Indian futures contract is sought.

Another global investor lobby, Asia Securities Industry and Financial Association (Asifma), too is said to have written to on the issue. 

The weightage of has come down drastically in the last decade due to tightening of rules and increasing compliance. The proportion of to total FPI investments had come down to 6 per cent in April, compared to nearly 50 per cent a decade ago.

"have been impacted largely by two factors. The compliance burden has increased significantly on the p-note subscribers. On the other hand, FPI registration process has been simplified to a large extent making direct participation easier. However, the instruments are unlikely to phase out as investors who prefer taking small exposure to the country will still prefer over direct participation," said Sudhir Bassi, partner, Khaitan & Co. 

image
Business Standard
177 22