Sebi wants P-Note users to come directly to India

Ruling out any concessions for hedge funds with riskier profile in Indian markets, Sebi Chairman U K Sinha today said P-Note users should eventually move to direct route of investing as their share in foreign portfolio investments here has already fallen to a record low of 9.3 per cent.
"From a peak of over 55 per cent in 2007, the share of Offshore Derivative Instruments -- commonly known as Participatory Notes -- has now fallen to 9.3 per cent. I see this percentage falling even further going ahead," Sinha said.
Allaying concerns that the tightening of rules for these offshore investment instruments would hit the flow of funds into Indian markets, Sinha said that new norms have been finalised after consultations with the foreign portfolio investors issuing these notes and they have been consulted even for finalising the formats for the new disclosures.

"We know each of the end user of ODIs on a monthly basis. Earlier the rules were not that tough and there were cases when they were misused by some Indian companies and nationals but that happened much before a detailed regulation was put in place in 2011. Now, there is not a single ODI that has been issued to an Indian national. There used to be opaque structures like Protected Cell Companies but all that have been barred," he said at an interaction here.
Stating that the rules have been tightened again on suggestions of the Supreme Court-appointed SIT on Black Money, Sinha said there are more than 8,000 FPIs registered in India but only 39 of them are issuing Offshore Derivative Instruments (ODIs).

"Idea is to make FPIs more simpler and reduce the difference between FPIs and ODIs. There are three categories of FPIs -- first category is of sovereign entities and central banks and there is no need to even do KYC as I can't go and ask for passport copy of US Federal Reserve Chairman, for example.

"For the second category, some of them can issue and subscribe to ODIs, but majority can not. This category is of broad-based funds, asset management companies, pension funds, insurers, banks etc. The third category of FPIs that include hedge funds and individuals among others cannot subscribe or issue ODIs," he explained.

Sinha also dismissed suggestions that some old FIIs, before new rules came in place, could pose significant compliance risks or foreign investors would stop coming to India, saying more than 4,500 new FPIs have come forward to get registered while the total number of FPIs including the old FIIs is more than 8,700.
Giving details, Sinha said investments by category-III
FPIs currently stand at only about Rs 77,000 crore while their count is just about 600. In comparison, there are over 7,000 category-II FPIs and they have invested over Rs 18,74,000 crore. There are about 300 Category I FPIs that have invested close to Rs 3,30,000 crore.

"We are very particular about hedge funds that are not broad based. We want to make it very well defined for ODIs. We have also put restrictions in terms of domicile of the ODI users," he said.
Sinha further said that foreign investors' influence as such is being counter-balanced by the domestic institutions including mutual funds in a significant trend that is emerging now.
Between March 2015 and March 2016, he said, FPIs' share in the free-float shares in Indian markets declined marginally from 21.35 per cent to 21 per cent.
During the same period, the mutual funds' exposure rose from 4.8 per cent to 5.8 per cent, while that of other domestic institutions rise from 6.7 per cent to 7.97 per cent, he added.

"This data shows that FPIs' contribution has gone down a bit but that of domestic investors has gone up significantly," he added.