Indian Regulator Publishes Draft Hedge Fund Rules

by Lorys Charalambous, Tax-News.com, Cyprus

01 June 2004

Following the Securities and Exchange Board of India’s review of global hedge fund regulation, the country’s regulator last week published draft proposals that will lift restrictions that prevent hedge funds from investing directly into local markets.

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

The draft regulations will allow a freeing up of hedging activity in Indian markets, although imposing restrictions to minimise risks. These 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.

“The presence of institutional investors in the fund is expected to ensure better governance on the part of the fund manager and fund administrators. Further, institutional investors may help fund managers to take a long term perspective of the market,” the SEBI proposals stated.

The new rules also require fund managers or advisors to be able to display a minimum three year track record and according to SEBI:

“This provision is expected to allow well managed funds to access our market and at the same time, keep our markets insulated from the possible adverse effects of ‘trial and errors’ by uninitiated rookies.”

The Indian regulator also stated that all sub accounts must be sponsored by registered foreign institutional investors subject to regulation in their home jurisdiction.

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