Friday, October 26, 2007

Hedge funds may find it difficult to invest in India after new norms

Pension funds allowed entry

While announcing rules to curb issue of participatory notes (PNs) by FIIs, the market regulator Securities & Exchange Board of India (Sebi) on Thursday, 25 October 2007, announecd that PNs can now be issued only to foreign entities which are ‘regulated’ in their respective jurisdiction and not to those that are merely ‘registered’ in the jurisdiction as was the norm earlier. This will mean that many hedge funds that are not regulated in their home country will find it difficult to invest in the Indian market.

Sebi has banned fresh issuance of PNs with derivatives as underlying and it has also directly winding up such PNs in 18 months, besides putting curbs on such issue of PNs in the spot market.

Sebi also changed the eligibility criteria for certain categories of investors that do not qualify as FIIs but want to register with the regulator directly. These entities include pension funds, foundations, endowments, university funds and charitable trusts or societies, which do not come under any regulatory authority in their respective countries.

Sebi has also drawn up what it calls “broad-based criteria” for PN holders that want to register as FII. Such entities should have at least 20 investors and no single investor can hold more than 49 per cent (instead of 10 per cent at present). With this relaxation, many new investors will be eligible for registration.

In another significant step towards removing procedural problems, the regulator said FII and sub-account registrations will be allowed in perpetuity

Sebi also said that it will consider the track record of individual fund managers instead of the fund for registration. This is because funds with a track record of less than one year were earlier not eligible for registration as FIIs.



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