'Changes in rules will further reduce relevance of P-notes'

The market for participatory notes is expected to shrink more as the Securities and Exchange Board of India (Sebi) has further liberalised the rules for FPI participation, said Sriram Krishnan, managing director, global transaction banking for Deutsche Bank India, in an interview with Pavan Burugula. Easing of investment limits and merger of NRI and FPI investment routes are key demands of FPIs currently, he added. Edited excerpts:What changes are foreign portfolio investors (FPIs) expecting in terms of regulations and taxes?FPIs would like to see the end of capital gains tax. Also, looking at what China has done recently by removing all investment limits, if we follow suit, then India can get included in the global bond indices, which will trigger inflows from large funds that track such indices. This can be quite significant. In terms of regulations, NRIs have for long been asking for a level-playing field, and would like to see the merger of the NRI regime with the FPI regime. The finance minister has, in fact, announced this in the Union Budget.How does India score in terms of ease of entry norms for FPIs compared to the other emerging markets?Having said this, we believe Sebi’s recent changes are path-breaking. The entire FPI universe now comprises of just two categories, and almost 75-80% fall under Category I. For those investors wanting to set up as Category I, all that is required is a simple application form and a few documents. So this time, the liberalisation has produced a very meaningful result. From the point of portfolio investment flows, what we have seen in calendar year 2019 is significantly better than 2018, which saw net outflows of over $11 billion. The announcements by the finance minister have since helped, and FPIs have invested over $6 billion in the past two months, and the improving global liquidity is expected to help further. What is the future of participatory notes?As an access product, while participatory notes have a place on the shelf, as a percentage of overall foreign portfolio investments, their share has come down from about 20% in December 2009 to just 2.3% in October 2019. Perhaps the key reason for their past popularity was around the cost and the difficulty level in setting up as FPI. Over the years, progressive market-entry liberalisation has led to a decline in P-note issuances. Operating cost for FPIs has also gone down with greater efficiencies being introduced in the market. Also, with certain rule changes, for example, prohibition of issuance of ODIs (offshore derivative instruments) referencing derivatives without a one-toone hedge, the relevance of P-notes for Indian security markets is expected to further reduce over time. We can certainly expect the recent transformative changes to further encourage direct entry.

from Economic Times https://ift.tt/2Qh9fgP