Foreign portfolio investors, who have pulled out close to $10 billion so far this year may have reasons to be happy with the easing of the curbs imposed on their investments through P-Notes. But they do not reckon that Monday’s SEBI move will open the floodgates for portfolio investment for a while.
Labelling the decision announced by SEBI today as cosmetic in terms of a trigger to step up portfolio flows, some of the FIIs said there were enough investment vehicles to take an exposure to Indian equities. In October 2007, SEBI had banned the fresh issue of P-Notes by FIIs to rein in the massive inflow of foreign funds into the Indian stock markets. The regulator had issued restrictions on FIIs and their sub-accounts, prohibiting them from issuing or renewing PNs with underlying as derivatives and directing them to unwind their positions within 18 months.
“The SEBI directive is a healthy move in the current market climate. It may help attract investors back to India, particularly, since India has outperformed other emerging markets in this correction. Today’s decision removes an impediment to accessing this market. But how soon this stimulates capital redirection is hard to say, given the uncertain and tenuous state of investor confidence. With rescue packages and bailouts in key global financial markets, these are likely to soak up any spare liquidity. It is a welcome move regardless,” says Stuart Smythe, ED, Head equity of Macquarie Securities (India).
At the imposition of restrictions last year (October 2007) P-Note holdings were estimated at $88 billion. Markets have corrected nearly 40%, which would put current holdings at $53 billion, of which almost $10 billion has been sales, leaving an estimated $43 billion. If one were to factor in Monday’s correction, the amount would have seen a further erosion of roughly 5.5%, said a senior official at a leading foreign broking house.
“This will not impact the inflow into the country. What we are facing is a global confidence crisis and the money is flowing to safest assets the markets can identify, like the dollar. This is the time for government to implement policies in infrastructure, thereby making India less reliant on foreign savings and more reliant on domestic savings. This would effectively mean that India’s growth is on track, irrespective of global developments. Investors are looking for safe economies where earnings are not at risk,” said Amit Bhartia, Partner, GMO (Grantham, Mayo, Van Otterloo & Co.), a global institutional money management firm.
SEBI’s decision to revise the rules marks a change from last year when India was battling inflows which had pushed the rupee to a new high against the dollar since 1998 and helped power the stock market to record highs. The FM had than said India would have to moderate inflows to avoid a stock market bubble. FIIs continue to be net sellers in the Indian equities markets, having sold more than $9 billion worth shares in the past nine months.
Net foreign portfolio investments for the similar period last year were more than $14 billion.
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