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Dodd-Frank law likely to hit foreign inflows

Hedge funds may stop investments as they stare at SEC deadline for registration

N Sundaresha Subramanian  |  Mumbai 

Amissive from the Securities and Exchange Commission (SEC) of the United States directing all investment managers managing $120 million (Rs 600 crore) or more to register with itself could hit inflows into the Indian market in the next few months, according to several foreign fund managers at the organised by here today.

“Many foreign investors who invested in India will take a pause. Not because they have changed their views on India. But, many of them have work to do in their offices to comply with the provisions of the Dodd-Frank law,” said Seth R Freeman, chief executive and chief investment officer, EM Capital Management, a San Francisco-based Foreign Institutional Investor(FII).

According to Freeman, these funds are required by the to register by June 1. The law also requires investment managers managing less than $150 million to register with the state regulatory bodies. The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted by the US following the financial crisis of 2007-08, includes provisions that require the to undertake various initiatives, including rule-making and studies touching on many areas of financial regulation.

For hundreds of hedge funds, which had an unquestioned reign over the financial world till 2008, life could be very different, said experts. Many of them are not comfortable revealing the identity of their investors.

“Some estimates put such investment managers at around 700 in the US. Many of them could be investing in India. They are not used to having a chief compliance officer. They do not like to be asked why they did what they did. Life is going to be difficult for them,” said another US-based fund manager, who refused to be identified, citing compliance reasons.

While several funds like EM Capital are already registered with the in the US and the Securities and Exchange Board of India (Sebi), hundreds of investment managers operating as do not register with any regulatory authority. Many of them use the participatory note (P-note) route to invest in India.

Thus, they are neither registered in India nor in their home country, keeping under wraps the identity of the beneficial owners of the underlying shares. In December 2011, Business Standard had reported that issuances with Indian equity derivatives as the underlying product are at a three-year high. FIIs have bought significant amount of shares in the Indian market in 2012. The assets under custody of FIIs went up to Rs 11.15 lakh crore at the end of February 2012, according to data. Of this, Rs 1.83 lakh crore or 16.4 per cent came through P-notes. Some officials, however, feel too much regulation could be counter productive.

Maurice Newman, chairman, Bradman Foundation and a former chairman of the Australian Stock Exchange said, “Politicans are getting into regulation and Regulators want to get into business. Regulators should look at ways to ensure transparency, but should not end up killing the business.”

First Published: Fri, March 23 2012. 00:21 IST