India eases restrictions on foreign investors

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Joe Leahy, FT Syndication Service
MUMBAI: India's stock market regulator eased the criteria for foreign institutional investors seeking to register to buy shares in the country's domestic market on Thursday, potentially opening the door wider for the entry of more hedge funds.
M. Damodaran, the chairman of the Securities and Exchange Board of India (Sebi), also promised broader medium-term reforms to allow greater market access, including introducing more derivatives products and improving cost efficiency.
"Allowing access to such people as today do not have access to our markets directly - that's our goal. We will get there through a series of measures over time," Mr Damodaran told a press conference.
The regulator was confirming the introduction of a series of proposals aimed at curbing foreign investment in the market via offshore derivative instruments, known as participatory notes (P notes).
Sebi sparked a panic last week when it released the draft proposals, which analysts believe had the underlying aim of cooling mass foreign investor inflows into Indian stocks in recent weeks.
These have driven up the value of the rupee, creating concern over systemic risk to the monetary system and undermining the country's export competitiveness.
P notes are derivatives based on underlying Indian stocks or derivatives that are sold by investment banks to investors, especially hedge funds, which either are not eligible to register to invest directly in India's market or do not want to go through the trouble of registering.
Mr Damodaran said Thursday the curbs earlier announced on P notes, including a ban on new notes based on domestic derivatives and severe restrictions on those based on underlying stocks, would go ahead as proposed.
However, to make it easier for former P note investors to come through the front door, he announced Sebi would ease rules governing the ownership of funds seeking to register as foreign institutional investors.
Whereas presently, no single shareholder in a fund is permitted to hold more than 10 per cent, he said this would be eased to 49 per cent - a measure making it easier for entities controlled by individuals and corporates to enter the country.
He also loosened rules requiring that funds investing in the market have a track record of one year or more.
This would now apply to the manager of the fund rather than the fund itself. The earlier rule had meant that newly set up funds were ineligible to register.
He also said pension funds, foundation funds, endowments, university funds and charitable funds would also be eligible to invest, even if these were not subject to a regulator in their home markets.