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India eases foreign fund investment rules to woo cash

Posted by Yogesh on Monday, 6 October, 2008

MUMBAI, Oct 6 (Reuters) – India’s capital market regulator on Monday removed most curbs on indirect investment notes by foreign funds to encourage inflows into a battered stock market, but analysts said few immediate gains were likely given global financial turmoil.

The Securities and Exchange Board of India (SEBI) removed the restrictions on issuing participatory notes (P-notes) where the underlying asset is a derivative, Chairman C.B. Bhave told reporters at a news conference after markets had closed.

It also scrapped a rule which said P-notes could only account for up to 40 percent of the value of assets held by a foreign fund, but said it still wanted foreign institutional investors (FII) or foreign funds to register.

“The curbs were no longer considered necessary. P-notes issuance has gone down substantially. A lot of FIIs have pulled out money,” Bhave said.

In October last year, the Indian regulator had imposed the curbs to cool down markets and calm a strengthening rupee by stemming arrivals of anonymous money.

“The long-term need is to review the entire FII participation structure. As FIIs acquire assets they need to have the right to dispose off these. So there will be outflows,” Bhave said.

P-notes are used by overseas investors to buy securities through foreign institutional investors registered in India.

The rethink comes amid a tough time for Indian markets as the world’s worst financial crisis in 80 years and a looming global recession rattle both shares and the rupee.

Foreign funds have sold Indian stocks worth a net $9.4 billion so far in 2008 compared to record inflows of $17.4 billion last year.

The rupee slid to a 5-½ year low on Monday, while the benchmark index .BSESN tumbled 5.8 percent to its lowest close in 2 years. It has fallen 42 percent so far this year.

“The message is that we need FIIs, we need hot money,” said Mehul Dedia, assistant vice-president of sales at Mumbai-based brokerage Sharekhan. “But international markets need to stabilise for inflows to come in.”

The removal of curbs will restore confidence but foreign funds are unlikely flow again immediately given the global turmoil, said Arun Kejriwal, strategist at research firm KRIS. Source Reuters

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