P-Notes regulations to stay

Sticking to the draft participatory notes (P-Note) regulations, Securities and Exchange Board of India (SEBI) on Thursday, announced that sub-accounts cannot issue participatory notes (PNs) and that FIIs have to unwind offshore derivative instruments (ODI) positions in 18 months. The regulator has also fixed September 30 as the date for calculating asset under custody for P-Notes. The rules approved by the board come into effect from October 25.

According to the new ruling, sub-accounts -- vehicles set up by registered FIIs to issue P-notes -- to wind up their positions altogether, although FIIs may apply to register proprietary sub-accounts. The Board has also approved the move wherein pension funds can register as FIIs, SEBI Chairman M. Damodaran told a news conference on Thursday.

Further issuance of P-notes by sub-accounts had been stopped with immediate effect, but proprietary, corporate sub-accounts could continue to do so till registration, he said. Those already registered as FIIs have been cleared, he added.

Indices ended on a firm note on Thursday ahead of the outcome of the crucial SEBI meet on the participatory note issue. Second rung stocks also participated in the rally. Metal shares were the biggest gainers among sectors.

According to SEBI, P-notes affect the transparency of inflows. It wants foreign portfolio investors to register so it knows the source of funds coming into the country. The finance minister has said India is also trying to moderate inflows to avoid a stock market bubble. India, the world's fastest-growing major economy after China, has battled a surge of foreign capital this year, which has pushed the rupee to its strongest against the dollar since 1998 and helped power the stock market to a series of record highs. SEBI wants FIIs to wind up existing P-notes on underlying derivatives over 18 months and restrict the issuance of new P-notes on cash positions.