Positive and -ves of new P note policy!!

The new P-note policy was announced by Sebi Chairman M Damodaran, at the Sebi headquarters today. The following were the positive and negative points that emerged:

 

 

 

NEGATIVES:

 

Ø       Date of calculation of AUC to be Sep 30

 

Ø       PNs can be issued only to regulated entities and not registered entities as per FII rules of 2004

 

POSITIVES:

Ø       Both proprietary, corp sub A/Cs can continue till final decision

 

Ø       Broad based entities with atleast 20 investors, no single investor can hold more than 49% (vs10% before)

 

Ø       Fund manager should have 1-yr track record, not the fund

 

Ø       Pension funds, charities, endowments to be considered separate category

 

The Securities Exchange Board of India's final rules on participatory notes, or P-Notes, has relaxed some of the rules on who will be registered as FIIs, analysts said. Sebi has stuck to its October 17 text of not allowing sub-accounts to issue PNs nor allowing PNs based on derivatives, they added.

 

Sebi's final rules that will govern PNs are not majorly different from the draft rules it announced on October 17, analysts said. As in the draft, the final rules ordain that sub-accounts of FIIs can't issue PNs hereafter. They will also have to wind down what they have issued in 18 months. Also, the regulator has maintained that PNs issued with derivatives as underlying won't be permitted hereafter and those issued will have to be wound down in 18 months, they added.

 

As for full-fledged FIIs, their status remains as in the draft, analysts said. They cannot issue PNs that are more than 40% of their assets under custody. Those above this level can stay put and can only issue fresh notes against cancelled ones. Those below the 40% limit can incrementally issue PNs up to 5% of their assets till they hit 40%.

 

The cut off date for assets under custody will be September 30, analysts said. Since sub-accounts have been banned from issuing PNs, foreign investors were keen to know if they will be helped to register as full- fledged FIIs through a more liberal definition. Sebi has done just that. It has said that if funds don't have a one-year track record to register, it will suffice if the fund manager has such a record.

 

While as a rule only entities regulated in the home country will be allowed to register as FIIs, analysts said. In India, entities like charitable trusts, university funds, pension funds, endowments, and foundations will be allowed to register even if unregulated.

 

Sebi has also modified its broadbased criteria to include those where one investor has more than 49% of the holding, they said. So far, one investor could not have more than 10% of the holding.

 

To ensure an easy transition into the new order, Sebi said that sub-accounts that have already applied for registration as FIIs, after the October 16 proposals, will be treated as FIIs and will be allowed to do business till the regulator finally registers them.

 

In a sweetener to foreign investors, Sebi Chairman M Damodaran said FIIs would not need to renew their registration each year but once in three years. However, what might prove to be the bugbear of foreign funds will be Sebi's clarion requirement that PNs can be issued only to entities regulated in the home country, analysts added.

 

After the new Sebi P-notes policy, analysts said that there is a lot more confusion. They spoke to traders in top brokerages across the country and observe that there is a lot more confusion that has emanated today, than there already was.

 

The biggest concern right now is the hedge fund regulation aspect. Analysts question why would hedge funds want to come in through the front door and get themselves regulated by the Indian regulator, when he cannot hedge in the derivatives market.

 

Nearly USD 25 billion of the volumes run today itself on the exchanges is coming from the F&O. About 10% of those volumes are from FIIs and about 50% of that is essentially from hedge positions.

 

So, volumes should dry up 5-6%. But traders say that the sentimental impact would be so negative, that it could clamp down volumes to about 20-40% of the F&O segments straight away. So, that is the initial impact.

 

There is still no clarity on AUC. In addition to that, the IPOs have not been addressed. There are issues like Reliance Power and Emaar lined up. We have seen the subscription issues, like DLF, amongst a whole host of others that have seen such huge QIP portions. Every leading banker involved in Emaar and Reliance Power said that a substantial portion of the money coming in through QIPs comes in through the P-note route. They are basically knocking off the IPO component as well.

 

The other interesting aspect is the hedge fund aspect in the right issue part of it, analysts said. Tata Steel's right issues are up right now and it has been open for a while. What if someone was a hedge fund and had already tendered into the rights issue? What happens to that person now? That's another mode of contention.

 

Yet another mode of contention, analysts said, is what if someone had an open short position in the market given the fact that they am playing in the F&O side and was transacting through a broker who has a percentage of his AUCs that have already crossed 40%. Someone cannot cover that up because they have no one who can buy with that person. So, what does that person do with his short positions once the markets open tomorrow? He is stuck.

 

So, there are in a sense also very ambiguous, analysts said. Volumes could essentially dry up by as much as about 20-40%. There will be a significant short-term impact. The general consensus in all brokerages is that this is a long-term positive move. The business is going to be impacted in terms of volumes especially since all of these guys are working on rights issue and IPOs of all these major bodies, analysts added.