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 »