Hedge fund tactics are often confused with shareholder activism, which traditionally involves investor’s participation in the company’s affairs on wider social concerns such as employment benefit policies, corporate governance norms and environmental performances. Informed shareholder monitoring can increase shareholder values and conventional institutional investors have been assuming this role replacing individuals. How are hedge funds different from investment vehicles such as mutual, private equity or venture? Hedge funds are usually pooled and privately organised with carefully selected high net worth members, generally passive with no control in the hedge fund’s business. Hedge funds steer clear of regulatory constraints, particularly involving registrations, disclosures, capitalisation norms, and are managed by highly incentivised and professional managers who focus on private markets, not having any potential conflict of interest situations which restrict broad based funds acting for a diverse client base, who are less inclined to aggressive activism. Hedge fund activism is not just directed at different aims, it adopts different strategies and entails higher costs. The involvement in corporate governance is with the objective of gaining control of the board and not just reforming it.   more »

Will hedge funds change their charter post Sebi's P-Note policy or will they look at an alternative way of investing in India? According to analysts, hedge fund inflows going into the market is around 10-30%. Macquarie said 20-30% of total participants would be unregulated hedge funds. There are around 1,000 hedge funds, which are operating worldwide. About 70-80% operate from US. Most hedge funds came to India in early 2002 as they did not want to be regulated. So, what is the view of hedge funds on the markets? Most hedge funds across the world said India might see volumes drop down in the short- to medium-term. They feel there will be a likely level-playing field after new categories of investors like pension funds and retirement funds get recognised. They also don't see panic in the market. According to analysts, there are other investment options. Hedge funds need to change their charter to convert from long-short to long only funds. Investors would opt for hedge funds or for higher returns. If hedge funds invest in long only funds then investors may invest via pension funds. Hedge funds may also look to registering under their home regulator.   more »

Participatory notes (PN) are in the news. They have had an impact on the stock markets. The market regulator, Securities and Exchange Board of India (SEBI), decided to hold back on PNs. So, what are PNs? Participatory notes are financial instruments used by investors or hedge funds that are not registered with SEBI to invest in Indian securities. The brokerages buy India-based securities and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors. A PN is an offshore derivative instrument (ODI). Many fund managers don't want to register with SEBI as foreign institutional investors (FII), but still want to play the stock markets. They contact a foreign broking house registered as an institutional investor in India and ask it to buy shares in the local market, and issue a synthetic share by way of a PN. There are about 1,000 FIIs registered with SEBI. Of these, only about 34 are both stock brokers and institutional investors. These are the ones that buy Indian stocks for their own clients as well as on behalf of those who do not wish to be registered in India. PNs have been expanding in India very fast. According to SEBI, the total foreign stake in Indian companies in August 2007 was around Rs 6.9 lakh crores, of which Rs 3.53 lakh crores is through PNs. One of the reasons why PNs have grown so fast is regulations on registration of FIIs.   more »

SEBI welcomes smart money into India, but that should be clean: This was the message the market regulator M Damodaran conveyed to the investing community on Monday. He was speaking to a host of foreign institutional investors to clarify some finer details on SEBI’s proposals to limit use of participatory notes (PNs) to invest in India. ‘‘We do not want a market indefinitely having elements of non-transparency and, therefore, we want a situation where we know who is in our market, we know the quality of money that comes into our market and we are comfortable with both of those,’’ the SEBI chief said. ‘‘That is the purpose of which we are trying to discourage one category of PNs,’’ he added. Videoconferencing with FIIs, Damodaran said the regulator had enough number of responses to move ahead with its proposals which will be discussed at its next board meet on Thursday. He also said SEBI had cleared 16 FII applications during the day and all of those received since October 16. Citibank, which so far operated in the Indian market using the sub-account route, has got FII registration. Among the main points of Damodaran’s conference was that FIIs who run sub-accounts only for PN trades will have to discontinue the same. SEBI will allow proprietary sub-accounts to be allowed to register as FIIs. Market players welcomed the moves saying that under such rules proprietary trading by large foreign brokerages will be much more regulated.   more »

In a move that could be of some relief to foreign institutional investors (FIIs), the Securities and Exchange Board of India(Sebi) is considering a proposal to allow proprietary sub-accounts to issue participatory notes (P-notes). Sebi Chairman M Damodaran is expected to discuss these and other proposals when he meets representatives of FIIs and hedge funds through a video conference on Monday. Sebi is expected to finalise the guidelines at its board meeting on October 25. Last week, the market regulator had proposed, among other things, a general ban on sub-accounts of FIIs issuing P-notes, which are offshore derivative instruments used by hedge funds and investors that are not registered in India. Many FIIs, however, have proprietary sub-account that are formed to invest their own money. These sub-accounts issue P-notes purely as an investment opportunity to earn a good return at minimum cost. Proprietary sub-accounts are different from other sub-accounts that are largely corporate structures or special purpose vehicles formed in tax havens by unregistered investors, with FIIs investing the money on their behalf.   more »

A host of such sharp volatilities in various markets have been due to these hedge funds. These tend to destabilise the markets, and can result in huge losses for long-term investors in such markets, who are not as nimble as the hedge funds. Some, however, believe that hedge funds provide liquidity and momentum to the markets, and hence are good for the markets. In fact, sometimes they create markets for illiquid instruments, and thus help other investors too. Also, they take more contrarian calls than the large established institutional investors, and hence make the markets broader and more dynamic. But given that little is known about the operational strategies of the hedge funds, it is difficult to categorically say whether they are actually good or bad for the markets. And so, the debate continues as to whether these funds need strict regulations, even in the USA, where such funds have been operational for many years now.   more »

Foreign investors await market regulator's clearance for registration. Over 270 applications from foreign institutional investors (FIIs) are awaiting the Securities and Exchange Board of India’s (Sebi) clearance as the debate on the speedy clearance of registrations by the capital market regulator rages on. In fact, during the last one year, the Sebi has cleared a total of 141 applications, an average of about 12 registrations a month. Presently, the number of sub-accounts are 3,445, according to Sebi data. The number assumes significance in the wake of the Sebi proposal to clamp down on foreign inflows through the participatory note (PN) route. Sebi sources said it was streamlining the registration process for both FIIs and their sub-accounts in a move to encourage direct inflows from foreign investors into the country’s equity markets. In a discussion paper issued late on Tuesday, the Sebi proposed policy changes on the offshore derivative instruments (ODIs), popularly known as PNs, and asked feedback from market participants. The Sebi board, which is meeting next Thursday, is expected to announce the new regulations.   more »

India has pledged to open the “front door” wider to hedge funds in an apparent bid to bolster foreign investor confidence after a stock market plunge triggered by a proposed crackdown on investment in the country through offshore derivatives. Hedge funds will be given easier direct access to the Indian stock market after the proposed curbs that have raised fears of a rush of selling by foreign investors. M Damodaran, the chairman of the Securities and Exchange Board of India, said the regulator had already registered some hedge funds as investors qualified to invest in the country. He said Sebi was reviewing regulations to see if there were more types of funds that could meet the criteria for entry. “We are looking at the content to see if we can bring in a few more people that might not presently qualify,” Mr Damodaran said.   more »

The last day for feedback on the Securities and Exchange Board of India's (SEBI) proposal on participatory note ban is October 20, Saturday. But local law firms are already flooded with enquiries regarding registration from foreign institutional investors (FIIs). Siddharth Shah, head of funds practice at Mumbai-based law firm Nishith Desai Associates, says he expects a significant surge in the numbers of registrations based on the level of enquiry alone. "Queries have not only been pouring in from the largest source of FII inflows - the US - but even from Europe and Middle East," Shah said. Shah has been receiving 15-20 queries during the past two days. "That's the level we normally receive in a month," he said. Mumbai-based investment bank and business consultancy Atherstone Group has proactively appointed its legal advisor, Sterling Law Partners, to set up helpdesks across global financial centres to assist FIIs. Atherstone will also begin seminars at Singapore, Hong Kong, London and New York on the registration process soon.   more »

Participatory Notes are financial instruments used by investors or hedge funds that are not registered with the Securities and Exchange Board of India to invest in Indian securities. Indian-based brokerages buy India-based securities and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors. In many ways, this is similar to an informal ADR process, where brokerages hold on to stocks for foreign investors. However, Indian regulators are not very happy about participatory notes because they have no way to know who owns the underlying securities. Regulators fear that hedge funds acting through participatory notes will cause economic volatility in India's exchanges. Many market participants believe that PNs are bad because they are unregulated. Some key brokers have said the market for P-Notes may become as big a market as the regulated exchanges — BSE and NSE — and end up dictating prices from outside. There is a reason to believe they will not. Despite the huge growth of P-Notes, the Indian markets remain fundamentally stronger and more efficient compared to almost all other emerging markets. That gives it the power to determine prices of stocks, without being influenced by parallel markets. In this entire hullabaloo over P-Notes, this is a fact that has somehow gone unnoticed.   more »