Let us first focus on the positives of the P-note policy, because the inclination, after such important events is only to figure out or focus on the contentious bits.
There are lots of positives out here. In that one-year track record that has come in, the definition of broad-based, the fact that many new categories of funds are now welcome to invest in India, and that proprietary and corporate sub-accounts can carry on with life as usual, in the transition period till they get registered. If they have put in applications, are all quite positive steps, in the context of what Sebi is trying to do.
The negatives or the contentious bits are that there is a little bit of grey area on IPOs and rights issues. But those are peripheral to my mind. The big issue is that statement from Sebi that only regulated entities are welcome to invest in India and to get registered, even registered entities won’t do.
That would come as bad news, for a large number of hedge funds, who have been getting money into this market, over the last one year. They will ask themselves, what do we do now, since many of them are not regulated. Of course, there are many regulated hedge funds and for them there is no problem.
But, for people, who are not regulated by any jurisdiction or any regulator, they have a problem, because Sebi is saying that they cannot buy P-notes. And if they apply for registration, the chances are that their registrations will not be accepted because they are not regulated.
So, that is the class of investors one needs to be worried about and it is unfortunate that some of them will probably not be able to invest in India.
They will still weigh the pros and cons. On the one hand, you have got the lure of investing in a highly profitable market. On the other hand, you have to go against your very grain of existence, which is open yourself up for regulation and for disclosures. So, some will bite, others will not. But I suspect that is the most contentious bit of what has come in today.
While September 30 might be the cut-off date and October 25, the date of operation, any activity which has gone on after that does not get included in the AUC. There is no reason to unwind any of those positions taken post-September 30.
So, I do not think the date is so relevant. What might be a bit confusing is the whole calculation of the AUC because Sebi refused to come out and tell us exactly how it would be calculated.
It just left it by saying it will be done as the custodian does it, and the custodian does not include derivative transactions, because they do not have custody of derivative products. So, derivatives are not included in the calculation of AUC by the custodian and that might actually change the definition of AUC.
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The definition of AUC is also a little confusing because of the exotic and derived nature of products, which many of these guys must have done overseas, as overseas derivative instruments and OTCs.
So, the definition of AUC is a little confusing. But it is an important transition and there will always be some elements of confusion. But if you are asking if there is complete clarity on the calculation of the AUC, I think no. There is still some grey out there.
There is good news and some not so good news, but generally, good news. The mood was come and invest in India, we do not want to shut you out. Many clarifications have come in.
But first the good news. The date has been chosen as September 30 and any positions taken after September 30 will not be included in AUC calculations. So, September 30 to October 25 is not part of AUC and you do not have to wind back any of those positions. I think there is some clarity on the AUC date and how that will be operationalised.
There are also some changes in the definition of broad based accounts to make it more lenient for a single investor with 49 per cent and not 10 per cent. The definition of the one-year track record has been expanded and now it is the fund manager's track record that comes into play and not the funds necessarily. That is all good news.
New products are coming, so new categories of investors can come in. Also, entry procedures are broad based. No jitters there, as far as one can see.
The grey area is on two or three accounts. There is still a little lack of clarity on hedge funds, which are not regulated by any entity. Here, the emphasis seems to be on regulation.
I suspect that might rule out a few hedge funds. IPOs do not get a separate category, they get clubbed in that 40% limit. That cannot be good news for the primary market and there is no clarity on rights issue as well.
The other good news is that not just proprietary accounts, but proprietary plus corporate accounts can carry on with business. This means issuing P-Notes till the transition period and till they are registered by Sebi as legitimate FIIs, so they can carry on with their work as usual.
We just need an additional clarification on whether that proprietary and corporate account functioning is under or subject to that 40 per cent limit or even that can be above that 40 per cent AUC limit. That is an important clarification because if it is above, then I think it loosens up strings quite considerably.
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