Why SEBI targeted P-notes
The Finance Minister's goal is to moderate capital inflows. Sebi's aim is to clean up the system. CNBC-TV18 reports on what may have prompted the regulator into action. Why did Sebi choose to target P-notes based on derivatives? Experts say that it is because the instrument was considerably complicating matters.
Many foreign investors could take a 6-month to 1-year position in the Indian derivatives market, that too using a derivative based P-note, whereas contracts in India are one or three months in tenure. Also, sources said that the exposure of some FIIs to the Indian market via derivative-based P-notes was noticed to be as high as 1000% of its total investments in the country.
This led some market watchers to believe that a lot of Indian money could be roundtripping back to India via P-notes. Also, many FIIs were said to be getting rather innovative with the way they structured P- note investments. For instance, some FIIs reportedly offer an over the counter product that invests in equity but promises a fixed return, let us say 2% over the increase in the Nifty.
The broker then hedges the client's equity position in the derivative market. To complicate matters, many FIIs are also to offer stock lending and borrowing to their P- note buyers, a process that has yet to take autonimityroot in India.
All these factors could have led to Sebi's proposed action on P-notes and this may not be the end of things to come. The regulator is said to be mulling the introduction of longer-term derivative products in India. The proposal is being drafted by a Committee and Sebi is likely to examine the matter in its November board meeting.
Source : Moneycontrol
Many foreign investors could take a 6-month to 1-year position in the Indian derivatives market, that too using a derivative based P-note, whereas contracts in India are one or three months in tenure. Also, sources said that the exposure of some FIIs to the Indian market via derivative-based P-notes was noticed to be as high as 1000% of its total investments in the country.
This led some market watchers to believe that a lot of Indian money could be roundtripping back to India via P-notes. Also, many FIIs were said to be getting rather innovative with the way they structured P- note investments. For instance, some FIIs reportedly offer an over the counter product that invests in equity but promises a fixed return, let us say 2% over the increase in the Nifty.
The broker then hedges the client's equity position in the derivative market. To complicate matters, many FIIs are also to offer stock lending and borrowing to their P- note buyers, a process that has yet to take autonimityroot in India.
All these factors could have led to Sebi's proposed action on P-notes and this may not be the end of things to come. The regulator is said to be mulling the introduction of longer-term derivative products in India. The proposal is being drafted by a Committee and Sebi is likely to examine the matter in its November board meeting.
Source : Moneycontrol
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