How do FII dealers view P-notes issue?

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Nifty BSE | NSE 25/05/12 Are Mutual Funds betting on Nifty?

CNBC-TV18 spoke to a host of FII dealers , who issue P-notes to their clients. The crux of the matter is that there is still a lot of ambiguity about the draft proposal. FII dealers expect some sort of changes, before the draft actually becomes a law. Some sort of tinkering is expected though no one expects a big change. The Finance Minister hinted that this will eventually become a law on October 25, after the board meeting.

 

There are still a few loose ends, observed analysts. The 40% limit, which is being given to all the FII brokerages, it is not clear if the 40% limit is on a daily, monthly or weekly basis and how this will be calculated.

 

Also, though there are a lot of registered FIIs in India, only 34-35% active FII brokerages issue P-notes. Analysts question whether this means that new FIIs will come out and issue P-notes. That looks unlikely as though they have been in India and have invested, it is not everyone's business to get into the brokerage space and earn the small 2.5% brokerage fee.

 

Not many new FIIs are likely to come out and issue P-notes. In that sense, P-notes are issued on various contract sizes. As and when it expires, it has to be squared off and there cannot be new fresh issuances. For every incremental buyout, henceforth, when these get expired, the limit will be a crucial thing. As of now, most of the top brokerages are over the 40% limit. So, they cannot buy anything fresh, till the other clients square off their long positions, so the limit goes below 40%.

 

In terms of actually implementing it, there seems to be lots of loose ends that need to be addressed by Sebi . Most of the brokerages said that they will give informal suggestion to the draft proposal over the next four days. There are a lot of  brokerage reports as well, which clearly said the incremental flows could go down  in the next 3-6 months. 

 

Since this 40% limit is hit by most of the brokerages, if and when there is no sellout from the other clients, they cannot do any fresh P-note buying. That is going to be a crucial thing to watch out for. As of now, there is no change in the ground reality. They are issuing P-notes and are buying on behalf of their hedge funds. But it is going to change as and when this becomes a law.