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Sebi cracks the whip on p notes

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The Securities and Exchange Board of India (Sebi) on Monday proposed tighter regulations participatory notes (pinstrument used by foreign investors to take exposure to the domestic market without registering in India.

In a discussion paper, the market regulator proposed to bar pnotes, or offshore derivative instruments (ODIs), from taking speculative positions in the futures and options segment.

It said noteholders would be allowed exposure to the derivatives market only for hedging and not for naked speculation.

The ban on derivative trades without underlying equity could impact nearly a third of ODI subscribers, who currently deal only in derivatives, say experts.

A large number of investors also deal in both cash and derivatives, but don´t use derivatives for hedging purpose.

“Through these changes, Sebi is trying to curb the volatility in the F&O market that emanates through ODIs.

This, however, should not impact participants whose investment strategies allow for correlation between their positions in the cash segment vis à vis their positions in the F&O segment. For strategies that access F&O markets without underlying exposure, the only option seems to be to roll over to the FPI programme,” said Richie Sancheti, head of investment funds practice, Nishith Desai Associates.

The restrictions on the derivatives trade could also curb tax evasion, said legal experts.

Business Standard New Delhi, 30th May 2017

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