Markets turmoil: SEBI to decide on P-Notes today

Mumbai: Market regulator Securities and Exchange Board of India (SEBI) will hold a crucial board meeting in Mumbai on Thursday to firm up proposals on Participatory Notes, a move to curb which had sent the stock markets on a tailspin leading to suspension of trade for an hour last week.

"I cannot guess what will happen tomorrow. The board will meet and will take a final decision," SEBI Chairman M Damodaran said at a function in New Delhi on Wednesday.

Pursuant to a discussion paper on which SEBI had invited public comments, the regulator will take a final call on its proposals to wind up the derivatives-based Participatory Notes in 18 months and curb these instruments based on assets managed by Foreign Institutional Investors.

Indicating that the proposals would come into effect, Finance Minister P Chidambaram had said last week that these would become regulations "with or without modifications."

During his interaction wit FIIs on Monday, Damodaran had also said: "We believe that responses we have on board at this point in time are adequate for us to take the process forward, in terms of the inputs received and those that we might receive."

However, many investors are peeved at not getting sufficient time to give their comments on SEBI's proposals.

SEBI had given just four days for comments on an issue as crucial as P-Notes, which continued to be in existence despite RBI repeatedly voicing concern against them.

In fact, a petition was filed on Tuesday in the Supreme Court to restrain the market regulator from implementing the proposals.

A retail investor from Karnataka, JR Narayana, said in his petition that a large number of investors, including himself, had been wrongfully prevented from making any comments in view of the short time span for receiving public comments.

Besides asking FIIs and their sub-agents to wind up derivatives-based P-Notes in 18 months, SEBI proposed that only those FIIs could issue further P-Notes whose value is less than 40 per cent of their assets under management.

They will also be able to issue further P-Notes at the rate of five per cent of their assets, as per the proposal.

But those FIIs, who have issued P-Notes of more than 40 per cent of their assets, could issue such instruments only if they cancel, redeem, or close their existing PNs.

In his interaction with FIIs later, Damodaran had asked sub-accounts issuing P-Notes to register as FIIs.

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The proposal evoked overwhelming response with 20 such sub-accounts opting to register as FIIs within the 24-hour deadline set by the market regulator.

Participatory Notes are instruments like contract notes issued by FIIs to overseas investors who cannot directly invest in equity market as they are not registered.

Out of over 1,100 FIIs registered with SEBI, only 34 have been issuing PNs. According to market sources, five major FIIs, including Morgan Stanley, Merrill Lynch Capital Markets Espana, Citigroup Global Markets, Goldman Sachs and CLSA Merchant Bankers account for about 60 per cent of overall PNs.

SEBI has pointed out that notional value of PNs outstanding has grown manifold to Rs 3,53,484 crore by August 2007 from Rs 31,875 crore in 2004 when there were only 14 FIIs.

At the end of August, outstanding PNs constituted about 51.6 per cent of total assets managed by all FIIs put together, as against 20 per cent in March 2004.

The Reserve Bank for long has been airing concerns over flow of funds into the country and stock markets through the PN route.

Many investors are, however, peeved at not getting sufficient time to give their comments on SEBI's proposals.

SEBI had given just four days for comments on an issue as crucial as P-Notes, which continued to be in existence despite RBI repeatedly voicing concern against them.

In fact, a petition was filed yesterday in the Supreme Court to restrain the market regulator from implementing the proposals.

A retail investor from Karnataka, JR Narayana, said in his petition that a large number of investors, including himself, had been wrongfully prevented from making any comments in view of the short time span for receiving public comments.