India Puts Down Welcome Mat For Hedge Funds

by Carla Johnson, Investors Offshore.com

30 July 2004

Senior Indian Finance Ministry officials have stated that the easing of registration rules for foreign institutional investors is aimed primarily at attracting hedge funds to register directly with the Indian regulator, SEBI, instead of routing their investment through the more restrictive participatory notes, according to reports.

“We want hedge funds to come and invest in our capital market directly. Why should the funds come through the PN route?" stated one official, according to the Hindu Business Line.

At present, hedge funds can only invest in Indian equity through participatory notes, derivative instruments that represent a holding in the underlying share.

However, draft regulations published by SEBI will allow a freeing up of hedging activity in Indian markets, with certain restrictions.

These restrictions include a stipulation that funds must invest across a broad range of instruments and a requirement that at least 20% of hedge funds registering in India must be of an institutional nature, e.g banks, insurance firms, pension funds, endowments and the like.

Responding to fears that the speculative nature of hedge funds will have a destabilising effect on India’s markets, a SEBI report noted that "all hedge funds are not necessarily speculative funds," and the Indian regulatory framework is sufficient to “keep the markets safe from potential abuse and manipulations.”

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