MUMBAI: Foreign fund managers are a worried lot today. They are also living in uncertain times. Sebi's proposals to change some of the rules how overseas derivatives instruments (ODIs, popularly participatory notes or P-Notes) could be issued by FIIs, have nearly stopped new P-Note issuance by FIIs.
And although the proposals are at a discussion stage, FIIs believe there won't be much change in the final draft.
The result has been nearly $1.7 billion (Rs 6,600 crore) worth of record FII outflows from the Indian stock market on Wednesday, provisional data showed. While about Rs 2,000 crore went out of the cash market, Rs 4,600 crore was withdrawn through the derivatives segment. Institutional dealers and top foreign brokerage house officials said that there is every likelihood market could witness outflows of similar magnitude over the next few days, said a dealer with a foreign brokerage.
JP Morgan, a global financial powerhouse, said in a note that the potential near-term outflow was uncertain. "Still, potential outflows are unlikely to be trivial: the unwinding of p-notes with derivatives as underlying could involve an outflow of around $4-7 billion, while the unwinding of p-notes issued by sub-accounts could well be larger," Rajiv Malik of JP Morgan warned in his note to clients.
One of the main points of concern for the FIIs is the Sebi's proposal to put limits on P-Notes issuance. The regulator has proposed that FIIs who are currently issuing P-Notes with notional value less than 40% of their total assets under custody (AUC), will be allowed to issue such instruments "at the incremental rate of 5% of their AUC in India." And for FIIs with notional value more than 40% of their AUC, could issue P-Notes "only against cancellation, redemption or closing out of the existing P-Notes of at least equivalent amount."
Now most of the FIIs who issue P-Notes, have are above this 40% limit. So what has happened at the ground level is FIIs are not issuing any more P-Notes. And given P-Notes are high-commission business for FIIs, they are losing out on one of their most lucrative business. "Overnight an important and profitable product offering from out bouquet has just vanished," said a top foreign broking house official.
Sebi said 34 FIIs and sub-accounts were issuing P-Notes, up from 14 in March 2004. In terms of investments, till August 2007 notional value of P-Notes was Rs 3.53 lakh crore (nearly $90 billion), which was about 51.4% of assets under all FIIs present in India.
No comments:
Post a Comment