The government and securities market regulator Sebi have agreed to allow foreign individuals, corporates and other investors such as hedge funds to register directly as foreign institutional investors — a move designed to increase transparency and reduce transaction costs for these investors. The proposal, which has already been discussed at the regulator’s board meetings, is set to be formalised at a meeting next month, said a senior official engaged in the discussions. By facilitating the entry into local markets without the need to lean on well-entrenched large foreign broking firms registered with Sebi, policy makers hope to see a waning of participatory notes (P Notes). P Notes are derivative instruments issued by FIIs here to overseas investors who may not be eligible to invest directly. They offer underlying Indian stocks, with the holder of the instrument entitled to benefits such as dividends and capital appreciation. A substantial portion of portfolio inflows into the country have been through the P-Note route. While some overseas investors prefer to use this route to hide their identities, many have taken recourse to this due to hurdles in obtaining registration as FIIs here. To invest in Indian stocks, they have to go in for a P-Note structure — for which the transaction costs are higher.   more »

The study was carried out by the Singapore Management University on hedge fund investing in China and India. It sought to test the notion that these funds are simply closet indexers, which 'hug their respective indices: and load up market risks' with their huge exposure. 'Indian funds suffer from the lack of external market for shorts and have not been able to maintain as low a market exposure,' The Business Times quoted Shirin Ismail, director of Fullerton Fund Management which commissioned the study, as saying. Such concerns have stemmed from a perceived lack of options to short-sell in these markets, the study said, referring to a technique used by hedge funds to take profit of a declining security price.   more »

With $35 billion in investment capital, DE Shaw and Co., the world’s fourth-largest hedge fund, has set its eye firmly on India. This September, DE Shaw will open its second office in India, just 14 months after it started off in Gurgaon, outside New Delhi. Having already done $561 million in announced private equity deals, DE Shaw will have invested well over $1 billion in India by June. Not surprisingly, the firm, which is famous on Wall Street for being very reclusive about its trading methods, is unwilling to give out much detail about its gameplan for India. However, three clear patterns emerge from the four deals that the fund has disclosed so far. First, while it is largely sector-agnostic, it will likely broadly focus on companies that exploit India’s cost arbitrage advantage (think auto ancillaries, animation); opportunities that arise from deregulation (think media companies) and public-private partnerships (think infrastructure and real estate businesses). Second, deals will also be size-agnostic, from as little as $8 million up to $400 million or more. While none of this is very different from the way most private equity firms that are active in India today would look in terms of their deals, it is a third pattern that sets the hedge fund apart from its private equity peers. DE Shaw appears to be very flexible on how it will make money available to companies.   more »

Indian policymakers will consider the merits of allowing hedge funds to register formally with the securities market regulator, the Securities and Exchange Board of India, and investing in the local markets at a meeting this week. The proposal to allow hedge funds — which are pooled investment of a few wealthy individuals and families — has been in the works for quite a while. The government has been of the view that it makes better sense to allow formal entry for these funds by registering them as foreign institutional investors (FIIs) in order to discourage the practice of such funds investing in the Indian equities indirectly through participatory notes (PNs). A combination of rigorous norms relating to registration of foreign portfolio investors and higher cost of transactions have prompted hedge funds to take an exposure to Indian stocks through a derivative instrument — participatory notes. This instrument, popularly known as PNs, has as its underlying — Indian stocks and the holder — entitled to capital appreciation and other benefits. Industry estimates place the share of hedge funds in total foreign portfolio flows close to 40%. In 2006, portfolio inflows aggregated $8 billion. In 2007, portfolio flows have been robust, especially in the past few months. Officials associated with the proposal said that existing laws do not bar the registration or entry of hedge funds. But for long, given the suspicion with which hedge funds are viewed for their role in destabilising markets and for other practices, Indian regulators have been reluctant to allow formal entry. “Even now they are permitted, but then we need to discuss it and take a decision which is more clarificatory in nature,“ a senior official said.   more »