Biz 365: Has Sebi's P-note move really worked in '07?

New Delhi: Talking about the markets, nearly $16 billion have flown into India till December and the Sensex has scaled the 20,000 mark.

But from a market regulation standpoint, the year 2007 would be remembered for Sebi's restrictions on participatory notes or P-notes.

This move was to moderate capital flows and deal with the issue of anonymous investors. But has it really worked?

The bulls have been on a rampage through the year and the dollar inflows become a deluge by October 2007.

While the unrelenting rally pleased the investor community and made for eye-catching headlines, the government was getting uncomfortable with each passing day.

Apart from the pressure it exerted on the rupee, there were fears that P-notes were being used a vehicle to bring in illegitimate funds from abroad.

In a defensive move the Government finally intervened their argument to moderate capital flows. Soon after the finance minister’s statement, market regulator SEBI stunned the markets with what are now being viewed as landmark proposals to regulate P-notes route and force foreign investors to use the front door.

As per the new regulations, P-notes with stocks as underlying could be issued by FIIs subject to a maximum of 40 per cent of overall assets under custody.

SEBI also proposed that where P-notes have equity derivates as underlying, these instruments cannot be issued anymore.

Such existing positions would have to be wound up over the next 18 months. Incase a FII wants to increase the share of P-notes in his assets under custody, the FII can raise the share of P-notes to the extent of 5 per cent at a time.

This caused confusion and even temporary panic. The markets tanked, hitting the 10 per cent lower circuit trading had to be halted for about an hour.

Finance Minister P Chidambaram was then forced to step out to calm the markets and lift investor sentiment.

Chidambaram said, “We have not banned P-notes. P-notes are not banned. In the recent months fund flows had become copious. The idea is to moderate these flows.”

Analysts say hedge funds may not be too keen to register with the market regulator though at least 20 sub-accounts had applied for FII status.

But despite all the controversy surrounding the new P-notes regulations, the dollar inflows haven't really stopped.

Till December FIIs had pumped in a whopping $16 billion into India and the markets have since breached the psychological 20000 mark.

This may make the Government become cagey again but investors are not complaining.