P-Notes, right move for medium term: Uday Kotak

Excerpts from Bazaar 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 Kotak Mahindra BSE | NSE 25/05/12 Are Mutual Funds betting on Kotak Mahindra?

Uday Kotak , VC and MD, Kotak Mahindra Bank believes the P-Notes move in the medium-term, is a right move, but it may hold short-term pain.

He said the direction of proposals does not go against capital flows. Sebi will encourage direct FIIs to register and may give FII registrations much faster than before, he said.

Kotak is of the view that there is no immediate pressure to sell on P-Notes issued for the cash market.

Excerpts from CNBC-TV18's exclusive interview with Uday Kotak:

Q: Mr JR Varma, Former SEBI Member, is making the point that he would have done it differently, would you have too or do you agree with this way?

A: I think first to step back and go to the concept, which is a medium-term right directional move by SEBI with short-term pain. We can talk about tweaking separately, but on a fundamental basis, medium-term move is the right move and there will be some short-term pain.

Q: How would you tweak it? How would you implement it now if you had to today?

A: If you really look at it, there are some nuisances, which obviously have to be looked at. Like in the case of derivatives, if there is a P-Note position on the 25th and 18 months is allowed, whether rollovers will be allowed or not, but if you look at the direction of what the proposed note is saying, it's not saying no to capital flows.

At the same time the sense we are getting is, SEBI would be moving in a pretty fast manner to register a lot more FIIs and therefore is saying, let me know who the investors are and I welcome them to come directly. So this is a structural move and I do not think we should look at it as just a way to stop flows. It is a move to get direct investors to participate in Indian market rather than through paying rent.

Q: I am quoting from what a lot of reports are suggesting today, including the IMF saying that restrictions on capital flows have generally not facilitated lower real appreciation. Just to be completely right on - do you read this as a capital control measure?

A: This is not a cap on capital flows. What regulator is saying, I need to know who the investors are and I believe the regulator will encourage direct FIIs to register. All PN holders, which are legitimate, should come and apply through the front door as FIIs.

And I believe that SEBI will be in a positive mood to give registrations much faster and on a significantly more active basis than before. So you are just making sure that people come through the front door and not behind the door.

Q: Your point about the medium-term impact is taken, but if this was the question then could it not have been achieved by the sunset time by which sub-accounts or P-Note holders would have to be necessarily registered as FIIs instead of doing the reverse and saying you need to wind-up your positions within a certain specified time?

A: If you go through the proposed guidelines for all investors who are in the cash market, either they are on hold or there is a period of 18 months for which they can continue to hold. Therefore investors in the cash market are protected.

PN has been issued in the cash market, there is no immediate pressure to sell on the market. As regards the derivative positions, effectively some of the foreign brokerages were operating as mini-stock exchanges offshore and therefore you had many stock exchanges in addition to our stock exchanges and that is unsustainable from a longer term view. And the Indian mood is that it moves slowly, but surely.

Q: On SEBI clause:

A: The first clause talks about 18 months for unwinding derivative positions also.

Q: I will also bring to your notice that the same clause you referred to, also says that FIIs and sub-accounts shall not issue/renew overseas derivative instruments.

A: Clarification is required; there is a disconnect between the first line and last line, so maybe in the final guideline there could be a clarification. But subject to that, if there is an 18 months window within which unwinding is required, I think that's fair.

Q: Is this differentiating between the colour of the money right now?

A: My point is, longer term the whole concept of FII registrations needs to be looked at; if you and I as individuals vis-à-vis US regulation want to buy US stocks, we just get registered with a US broker and we are allowed to buy and sell stocks in the US.

At some point of time India has to move there, where anybody from outside India wants to deal in stocks, the broker in India does the KYC, should be competent to do a KYC, should be able to convince the regulator that he is doing a good job on that and thereafter the investor should be dealing directly with that broker.

This whole concept of registration is a unique Asian concept; many countries are going away from it and I think at some point of time India must allow free flow with making the security swarm or the broker directly accountable for doing the investor KYC and that's how you move in this market. But in the interim, you are going to see a significant increase in direct registrations and there I would tend to agree with Mr Varma on this point that we must have more and more direct registrations and not have too much of baggage about whether a long-short fund is good or not.

I think those judgments we've got to leave it as long as the investor is genuine or set of persons who are identifiable. We should not worry about giving them direct registration and I think that's the direction India will move toward in the interim till we finally move to direct registrations with brokers themselves.

Q: Just a practical question on what happens over the next few days, since your organization interacts with a large number of these clients. Would people find it easy to move to other instruments where they can park some of their India positions? How much time does it take to open an FII account from a sub-account of a Participatory Note instrument?

A: There is interim pain and that pain will reflect both in the cash market and the futures market. I would believe that SEBI would move faster on giving new registrations and maybe that's a question SEBI is best positioned to answer. But if there is a clear signaling by SEBI that they are giving registrations faster and in a speedier manner, that will allay some fear of this interim situation. I would tend to hope that registrations happens faster.

Q: What's happening on the other side of the capital market, that is the currency? For many, this seems to read as a move to control the currency than the equity markets. Where do you stand on that?

A: I suppose when policy makers take decisions - first of all I don't believe that SEBI has been influenced by the currency decision. Having said that the decision has been taken collectively by all concerned. There was a high noise level from exporters and others, where millions of jobs were, so there was an issue there, which needed to be addressed. But I do not think SEBI has given any signal that they want to stop capital flows.

Therefore in a sense, it's a positive move to clean up the quality of capital flows as the regulators see it. At some level there will be a short-term pain in the capital markets undoubtedly, but structurally if we can manage more registrations, front door entry culminating into direct registration with the securities firms themselves that is where India has to move like a modern market.