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 »