The Hindu Business Line : Post SEBI clarification: Unwinding by some likely

SEBI’s much-awaited dialogue with foreign institutional investors on Monday on the participatory notes issue has provided some clarity on how it proposes to manage the transition of PN-routed investments in Indian equities to direct and more transparent investments. The positive takeaways from these comments for the markets are that: One, the regulator intends to allow proprietary sub-accounts to register with SEBI as FIIs (provided they submit a letter of intent shortly). The regulator has also clarified that a single entity can have many registrations and that there would be no bar on the number of sub-accounts registered by each entity. This may allow some of the larger institutions who have issued PNs, to manage the transition through multiple “sub-account” registrations. Second, the regulator plans a re-look at the basic eligibility criteria for registration as an FII. This gives rise to hopes that new categories of investors, who were hitherto denied a direct route to Indian equities, could eventually be allowed into the Indian markets broad-basing the profile of investors.

However, the regulator does not seem to be keen on relaxing its stance on two key aspects relating to the PN issue. One, investments routed through PNs will be restricted to 40 per cent of the assets under custody for each entity, as stated earlier. Secondly, investors who remain unregistered after this transitory phase, will be required to unwind their positions within the next 18 months and there will be no relaxation in this time limit. Overall, Monday’s clarifications do suggest that a smoother transition may be managed for PN-routed investments by investors willing to take the direct route. However, unwinding of positions by investors unwilling to identify/register themselves appears likely to continue.

Investors may thus have to brace for continued interruptions in liquidity flows into Indian stocks, and volatile stock prices until further clarity emerges on this issue. Shaky global cues may only exacerbate domestic stock price volatility.