Hedge fund curbs may pose short-term probs: Prime Sec

Excerpts from CNBC-TV18’s exclusive interview with N Jayakumar:

Q: What will the market takeaway from all of this tomorrow morning?

A: There are two aspects here which need some kind of clarification. In the past, hedge funds that did not want to be regulated would come in through P-Notes. Now, that PN route has also been closed for them. From a market takeaway perspective, the initial reading meant that even hedge funds couldn’t get FII registration whereas the fact of the matter is that if you are not regulated anywhere else, you can still operate in the Indian market by being regulated here i.e. come through as FIIs.

It is fairly clear that hedge funds that want to operate here can register as FIIs based on the other norms being satisfied. I believe that ultimately hedge funds like everyone else are chasing returns. So, if this market offers returns, my own sense is a number of hedge funds will be willing to make that adjustment to come in, register, and hence participate.

The number of participants allowed to operate in the Indian market has been broadbased dramatically as a result of pension funds, family offices, etc coming through as sub-accounts or applying as FIIs in the operating year. We can actually say that the entire thrust of this entire thing was always to be a clean up of the kind of people coming in. To that extent, if you are not regulated anywhere else, you will have to come in and be regulated in India. If you still want to operate in India without being regulated, you at least should be regulated somewhere else and operate through PNs. Those are the two clear messages and I don’t think the markets are going to takeaway anything other than a very thumping positive out of this.

In the short-run, there are problems in the sense that some people may not able to access the PN route. But if people here are chasing returns and hedge funds ultimately are repositories of funds, which are chasing returns into India, then the adjustment will be made, I have no doubt about it.

Q: What did you takeaway?

A: The rules are effective tomorrow morning, which means if you are above 40%, there is no way you can issue a fresh PN. If you continue to have PNs, which take you below 40, then you can go up to 40 to the extent of 5% a year.

Beyond 40%, there is no way that a fresh PN will be issued. Below 40%, you have that freedom. Interestingly, on AUC, media and others had indicated that most people were above 40%. However, today the Sebi Chairman actually clarified that very few entities have gone above 40%.

He also mentioned that the AUC calculation is as per what the custodians are providing him with. It means that he is going by a deceleration of AUC. The AUC, as calculated by the custodians, is probably a gross computation of all outstanding contracts. Therefore, it gives you a much larger latitude for the computation of PNs. Only a few entities are above the 40% mark. This is by inference, which is why he has concluded, that so few people are above the 40% mark.