India’s proposed investor curbs may have some bite

By Saikat Chatterjee and V. Ramakrishnan, Reuters

MUMBAI — A plan by India to restrict an avenue that allows foreigners to invest anonymously in India’s soaring stock market may prove effective at moderating the unwanted side-effects of an unprecedented inflow of capital.

Indian authorities have watched a tide of portfolio investment enter the world’s fastest-growing economy after China with increasingly mixed feelings, ratcheting up efforts to ensure the funds don’t push the rupee out of control.

Analysts say the measures, if implemented by the regulator on Thursday, could see a short-term net outflow of about US$6 billion from Indian equity derivatives.

That’s roughly a fifth of the underlying value of derivatives purchased through so-called participatory notes, which allow anonymity, based on regulatory figures.

When the curbs were first announced last week, stocks initially dropped a sharp 9 percent on fears that a flood of foreign investment would pull out of the market. Reaction since has been calmer as investors tried to gauge the impact of the measures. The main Mumbai stock index is now down a little over 4 percent since the announcement.

Participatory notes, or P-notes, are issued by foreign investors registered in India to investors overseas.

The regulator, the Securities and Exchange Board of India (SEBI), wants to phase out P-notes on underlying derivatives over 18 months and restrict the issuance of new P-notes on cash positions.

It wants sub-accounts — vehicles set up by registered foreign investors to issue P-notes — to wind up their positions altogether although it has also said some can convert to registered foreign investors.

India’s finance minister says restricting P-notes is aimed at warding off a bubble in the stock market, which has jumped as much as 39 percent this year.

SEBI said Monday it had enough responses from foreign and domestic investors to move ahead with plans to restrict the use of surrogate investment notes by foreigners.

SEBI Chairman M. Damodaran told a televised videoconference that the application process to register as a foreign investor took just a few weeks and media reports it had 500-600 applications pending were exaggerated. “We believe that the responses we have on board at this point of time are adequate for us to take the process forward,” Damodaran said.

SEBI is due to meet on Oct. 25 when it is expected to finalize the proposals outlined last week.

Damodaran said some FIIs registered in India had set up proprietary sub-accounts to handle their P-note program.