Indian Regulators Open Front Door To Hedge Funds

Apr 13 2007 | 11:17am ET

The news coming out of India is enough to make hedge fund managers giddy. Investing in India through participatory notes may soon be a thing of the past, and the ban on short selling has been lifted. But not all managers are dancing in the streets of Mumbai just yet.

M. Damodaran, chairman of the Securities and Exchange Board of India, recently said he would allow hedge funds to invest directly as foreign institutional investors and “disclose their identities rather than be present here through the promissory note route.” And this week, Finance Minister P. Chidambaram told delegates at the annual conference of the International Organization of Securities Commissions that the onus of allowing hedge funds into India through the front door is on SEBI.

“If hedge funds wish to come to India, and if SEBI is comfortable in allowing them, then I’m sure SEBI will put in place appropriate regulations,” he said.

Hedge funds such as Milan, Italy-based Aletti Gestielle Societa, Toronto-based DGAM Emerging Markets Equity Fund and Blackrock Advisors have reportedly registered as FIIs, and others are likely to follow. “The issue of allowing hedge funds and other foreign institutional investors to register in a more open, less cumbersome fashion is a good move because it does encourage more foreign investments,” said Matt Mongia, who recently launched a multi-strategy India-focused fund dubbed the Vishwas India Fund.

“Under the current system, many funds have been able to come in relatively anonymously and SEBI’s real concern is knowing who the underlying beneficial owners are.”

In addition to allowing short sales by institutional investors, SEBI has put in place a system for rating initial public offerings, as well as forcing real estate companies looking to tap the public market to show the current value of their landholding.

 “Shorting will allow funds to take the other side of the trade on a specific stock, which improves the efficiency and liquidity,” said Mongia, who added that the tightened rules for real estate IPOs are “significant, because Indian real estate publicly traded stocks have been some of the best performers over the last few years. 

Mongia currently doesn’t own any publicly traded real estate stocks and is bearish on the sector due to valuation but said he could invest in the space in the future.

Gautam Prakash of Monsoon Capital, views SEBI’s latest buzz with caution. “Whether allowing short selling dampens or increases voalitlity remains to be seen,” he said. “It’s just an announcement and they haven’t laid out the processes and system of actually borrowing the stock and other details that have to be worked out before effectively implementing short-selling. There’s still a fair distance to go before this becomes a reality and I would think it’s going to be at least six months from now.”

Prakash, who is currently not registered with SEBI, thinks allowing hedge funds to participate in the Indian market as FIIs is a good move, but doesn’t see any problems with the current participatory note system. “I don’t see p-notes as being that damaging or negative to the market. I think they’re attractive as trading mechanisms given the anonymity and lack of regulatory work that has to be done by the p-note holder.”

by Hung Tran

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