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 »