Sebi losing sleep over P-notes

Market watchdog Sebi plans to take the sheen off participatory notes and that too, not by cracking its whip, but by making the instrument lesser attractive to foreign investors. In this exclusive story, CNBC-TV18 finds that the regulator is also trying to use a similar approach to register hedge funds!

White money or black money? Hot money or the money of long term investors? As the debate on the colour of money becomes hotter - regulator Sebi is taking no chances. It plans to bring in more transparency into the foreign flows - and not by tougher regulations, but by better economics! And among the regulator's priority list is Offshore Derivative Instruments, or Participatory Notes.

M Damodaran, Chairman, Sebi calls, "PN route attttractive, because of low costs. Sebi is exploring making investments directly more attractive than PNs for foreign investors."

A participatory note is a derivative instrument issued by a Sebi-registered FII to those foreign investors, who want to buy Indian stocks. It is believed that many hedge funds use the PN route to invest in the Indian market. And so, regulator Sebi is also trying to convince these investors of the benefits of investing directly into the Indian market.

"Sebi is in dialogue with representative organisation that represent such investors. We are trying to tell them that those compying should apply and invest in their own name instead of using PN route. Over time, it will become more expensive to use other routes to invest in India," says Damodaran. That is an issue that many market experts and bankers will be keenly watching.

Many times in the past, the P-note route has been severly criticised for its opacity. That is because investors coming in via this route do not have to declare their identity. And so it is widely believed that the route has also been used to launder money. Many market participants say that while a cost disincetive will help Sebi partly, it may not necessarily control India's big P-note problem.