Tuesday, December 12, 2006

Hedge Funds in India

December 7th 2006



By Joe Leahy in Mumbai

India is considering allowing hedge funds to set up shop in the country in the first half of next year as part of new rules governing foreign portfolio investors.

Hedge funds are already indirectly active in the country's burgeoning stock market through so-called "participatory notes", instruments linked to an underlying Indian security that are sold by approved investment banks. But they are not able to trade stocks directly.

"When they are already present in some sense in the markets and they're partaking of our growth story, why not allow them to come in through the front door and deal with us directly?" said Mr Damodaran, chairman of the Securities Exchange Board of India, the stock market regulator.

The coalition government has traditionally eyed hedge funds with deep suspicion amid concern they could cause increased volatility in the stock market.

But they have become a growing part of the investment landscape. Some 40 to 45 India-dedicated offshore hedge funds - 7 per cent of Asia's total - have sprung up during the past couple of years, according to GFIA, a hedge fund industry consultancy based in Singapore. They have an aggregate asset base of $2bn-$3bn.

Mr Damodaran said the initiatives affecting hedge funds were part of an overall review of the country's regulations governing the registration of foreign institutional investors that is expected to lead to clearer guidelines on who should be allowed in.

The result could be the winding down of the participatory note system.

He said foreign portfolio investors would be screened - based on whether they are subject to quality regulation in their home jurisdiction, the credibility of their major shareholders and whether their investment style would "promote volatility".

However, any move to allow hedge funds will face several hurdles, industry experts say. India still does not allow short-selling, although it is reviewing the issue, and industry experts expect the government to have difficulty forcing foreign funds to divulge details of the identities of their investors.

"The thought is good but the implementation will be harder," said Pashopati Advani, of Advani Share Brokers, an adviser to Avatar Investment Management, an India-focused hedge fund.

Mr Damodaran said Sebi had released new rules on ownership of Indian stock exchanges allowing any single investor, foreign or Indian, to hold a maximum of 5 per cent in an Indian stock market.

He also said the Ministry of Finance was working on rules that would permit total foreign investment in a stock exchange of 49 per cent.

Foreign strategic investors would be permitted to hold up to 26 per cent while foreign institutional investors would be allowed to buy up to 23 per cent.

(c) 2006 Financial Times Information Limited.

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