FIIs get a breather on P-Notes

Sebi to fast-track registration; proprietary sub-accounts have to register.

Securities and Exchange Board of India Chairman M Damodaran stood his ground on restricting the use of participatory notes (P-notes) by foreign institutional investors, but made two important announcements.

The first is to allow proprietary sub-accounts of foreign institutional investors (FIIs) — i.e. sub-accounts that are formed to invest their own money — to issue P-notes provided they apply to register themselves with Sebi in the next 24 hours.

The second is to put registration of FIIs on the fast track. Addressing FII representatives from all over the world through a video conference, Damodaran, however, said the issue of offshore derivative instruments by other sub-accounts of FIIs will not be possible after the changes it proposed last week come into force.

The Sebi board is scheduled to meet on October 25 to take a final decision.

“We will allow the sub-accounts of FIIs to apply for a full licence if they are used for their own trading, and will process the applications in about a week,” Damodaran said.

Other unregistered investors using derivatives to invest in stocks will have to unwind in 18 months, he added.

The Sebi chairman also said more than one entity from an FII can also be eligible for registration.

Unregistered investors, including hedge funds, have invested a cumulative $88 billion in Indian stocks. The government does not permit hedge funds to directly buy equities, so they use derivatives to invest.

Proprietary sub-accounts are different from other sub-accounts, which are largely corporate structures or special purpose vehicles formed in tax havens by unregistered investors, with FIIs investing the money on their behalf.

FIIs were of the view that they are already registered and hence there should not be any ban on P-notes issued by their own sub-accounts.

On the issue of speeding up the procedure for registering FIIs, Damodaran said Sebi had cleared 16 applications today, setting to rest the perception that the regulator delays registration of FIIs.

One of the proposals cleared was of Citibank’s application for a proprietary sub-account.

He also said that the Sebi board will review the registration procedures in its next board meeting and will consider broadening the list of various categories of investors that can come in as FIIs and invest here.

The regulator may also review the one-year track record period needed for getting FII registration.

Damodaran made it clear that P-notes are here to stay for long, but with limits. “We believe that the responses we have on board at this point of time are adequate for us to take the process forward,” Damodaran said.

In its proposal, Sebi had proposed limiting the issuance of additional P-notes, and capping the amount that can be issued by each broker.

The regulator proposes to set a limit of 40 per cent of assets under custody for issuing new notes. Brokers who exceed the limit will need to pare their outstanding notes. Brokers who have issued less than the limit may do so at an incremental rate of 5 per cent of their assets under custody.

The Sebi chairman, however, did not agree that the FII registration norms are slow and said clearance is pending in many cases as the applications are either incomplete or because the Sebi board has yet to take a decision on allowing that category of investors to register as an FII.

In many cases, it has been found that the custodians have not forwarded the applications to Sebi.

FIIs have bought a record $19 billion of Indian securities this year, more than double last year's $8.9 billion. More than half has been invested in the month since the US Federal Reserve cut interest rates.

ONE STEP BACK

Sub-accounts owned by FIIs to invest their own money, can issue proprietary notes provided they apply for registration with Sebi in the next 24 hours. FII registration put on the fast track Sebi cleared 16 applications on Monday