M Damodaran, SEBI chairman

According to Damodaran, a large part of offshore derivative instruments, or ODIs, with underlying derivatives to be unwound. "Outstanding PNs with Indian derivatives can be renewed subject to 18-month close."

The draft is a part of inter-regulatory consultative process, he said. However, he clarified that they have not said that new PNs cannot be issued. The SEBI is not just addressing capital flows issue, he said.

Damodaran informed that the top PN issuers have been cooperative about providing details. SEBI did not have any meeting with FIIs before drafting P-Note letter. He added that they have received hedge fund applications to register with SEBI. The hedge funds can come via PNs, but subject to draft guidelines, he said.

They are revisiting FII registration procedure, he said. He pointed out that they are looking at some promoters who are routing their money out to re-invest in India.

CNBC-TV18 shares with domain-b its exclusive interview with M Damodaran:

You are saying that all underlying futures positions held by P-Notes have no problem of rolling over from month-to-month for the next 18 months, right?
Let me read to you what it is that it stated - it says that an outstanding PN with an Indian exchange traded derivative as underlying, can be renewed, subject to such reviewed PNs being wound up over a period of eighteen months.

So anything, which is expiring this month or next month, can be renewed till the ultimate date of eighteen months is over?
Let me also add - in order to avoid the confusion that seems to be getting spread that this has nothing to do with the period of the Indian exchange-traded derivative contracts, which will continue.

So everything can be rolled over?
Yes, obviously.

It was not so obvious, reading your first proposed measures early this morning.
Harmonious construction.

In your note you seem to be saying it is the anonymity (of the investor) that worries you, but the finance minster is saying that it is the quantity of capital flows, which is why you may have taken this move
I do not think that we have said that it is only the anonymity that has been bothering SEBI or anyone else. We have spoken about the number of issues, which have come up in the inter-regulatory consultative process over a period of time and during examinations with SEBI itself, this is not something that we just brought up just like that.

It is a result of a lot of deliberations having taken place in what to do with our policy on ODIs and that is why we put this out now in the public domain for getting feedback on an urgent basis.

So it is SEBI''s desire to cut down or moderate the amount of capital, which is getting into the equity market from FIIs?
Is that what we have said? We have not said that the FIIs cannot invest in the market more than they had so far; we have not said that new PNs cannot be issued.

Because that is what the finance minister said…
I know what he said; you are trying to look at this as either or kind of a position. The universe that is involved in policymaking whether it is government or the regulators; they address a number of issues and together we take a course, which we think, is important for the system.

This has several components. There is clearly a question of flows coming in that the finance minster described as copious inflows into the Indian market. There were also issues that we have had with what we need to do to tweak the regulations regarding ODIs.

So we thought that all of this could be done together; I am not saying that we are not addressing an issue that the Finance Minister raised, but we are also addressing an issue that has been a SEBI issue for a while.

So this move is not at the behest of the finance minister to control the quantity of the capital flows?
It is not at the behest of anybody. It is a consultative process. We all work within a system and I did hear some comment about this driven by RBI, is this driven by somebody else?

It is driven by all of us who have one objective, which is to see that we provide for the average Indian investor, and keep the Indian economy as a system that is stable and safe. We are all working in the same direction and this information, we have put out in regard to the area that we regulate.

Was it the case that you spoke to the top five or seven large issuers of P-Notes in this country and they refused to cooperate in disclosing the identities of their clients which is why you had to take this step? You could have had a sunset clause for those P-Note investors to move towards an FII registry route after which they could not have done it. Why did you not choose that route?
I spoke to, or did anyone here speak to the top five people and did they refuse to give us details?

I think to the credit of those that are in our market, they are extremely cooperative and when we seek information, we get information except what they might not be enabled to give us.

And then we have other ways of getting the information. We have inter-regulatory cooperation across securities regulator, various jurisdictions.

And therefore there is no question of our asking somebody something and they are not giving it to us or not cooperating. I think that is very unfair to those who are in our market, they are extremely responsible people and they will do nothing to see that they do not give what a regulator legitimately wants.

We did not have any meeting with the FIIs. This is an issue, which goes beyond five FIIs or five note-issuing people. This is an issue that affects Indian investor, this is an issue that is implication to Indian markets and therefore we put out a consultative paper, why should we have a conversation with a limited audience in privacy and then formulate policy.
I think through your channel and other communication channels; we have said time and again please look at our FII regulation if you are compliant, apply. Come through the front door, we want you in our market in your own name so that we are comfortable dealing with you and you are comfortable dealing with us and that is a process that has got kicked off.

We are seeing applications coming in and we believe that some of those who are buying P-Notes, now, will come into our markets in the periods of eighteen months. We believe that some sub-accounts that want to continue issuing ODIs, will now gets registered as FIIs that can issue ODIs provided they are within the limits that we have set.

I think there is enough scope for people to relocate themselves in our regulatory universe; it is not as if we have banned something, shut the door or something or created some major problem for people in our market.

What happens with hedge funds now because many of them choose not to get registered in any jurisdiction? Are you saying that those people who are not registering now cannot invest in India?
Those who described themselves as hedge funds have sought registrations with us and, therefore, I think it is a question of who wants to invest in our market, who sees that this is a growth story and I am sure if India is seen as a growth story, they want to come in and the only way that they can come in is to register and come in. They are looking at it as an opportunity to come in and we have applications with us at this point of time.

So that is not the entire universe of hedge funds because many of them do not register anywhere. So if you do not register as an FII being a hedge fund you cannot invest after the eighteen months period, right?
I am not saying that, I am saying that you can come in through P-Notes in the set of measures that we have contemplated. P-Notes that are having Indian equity as underlying; we have sought to distinguish those that have Indian equity or Indian debt as underlying from those that have the Indian exchange traded derivatives as underlying.

So if they come in through PN that has Indian equity or Indian debt as underlying and is issued by somebody who has been enabled to issue in terms of this package that we have put out, I am sure that they would be able to continue to be in our market.

I was asking you whether you will work towards easing the registry regulations for FIIs who are coming through sub-accounts today on P-Notes or even hedge funds who may consider registering?
We are revisiting the FII registration procedure as well as the content and we will facilitate the investment directly by registering as many FIIs as will comply with our regulations. So, we have a process that is going on. We are revisiting both the process as well as the registry regulations.

And when that happens, will the money flows continue to be as spectacular as they have been in the last couple of months? If after the FIIs get registered, flows were as strong or even stronger than you have seen in the last couple of months, what would you do then?
Clearly, we would come up with a solution that addresses that kind of a situation, should such a situation be problematic. It is entirely possible that that might not pose a problem at that point of time. And therefore why attempt to answer a hypothetical question?

It is not very hypothetical; it is fairly reasonable to ask whether flows would indeed go down after all the FIIs that you seek to registering actually get registered, they may remain as strong? To the finance minister the central problem seems to be about the strength of those capital inflows. I think it is generally a fair question to ask at least on how you, as a regulator, would approach it if that situation presented itself to you over the next 18 months?
Clearly, what is seen as a problem today need not be a problem 18 months down the line. There could be a change in absorptive capacity, Indian industry could reposition itself, reinvent itself, make itself more competitive in the intervening period.

A whole lot of things can happen in an area that I do not regulate. And therefore, I might not be the right person to respond specifically to that, except to say that you heard the Minister this morning saying that we are not against anyone investing in our market.

We do not intend restricting the inflow over a long period of time.

There is no capping; there is no ban on P-Notes. There is an issue at this point of time, and regulators and governments have together addressed it and in our area, what we thought needed to be done, there has to be a convergence of interest, we wanted also to revisit the participatory note regulations. So, all of that has happened together and I think that partly hopefully addresses problems that lie elsewhere also.

In your probes into the participatory note route, have you found any evidence of Indian promoter money or money from Indian shores going out and coming back through a circuitous route that is making you apprehensive as a regulator?
We have seen news reports suggesting that part of the money could be Indian promoters money getting rerouted, and our surveillance division clearly is looking at all the information that is coming in to see whether there is something that we need to go through.

You and the finance minister both have repeated that you are not banning P-Notes. But with this 40-per cent exposure norm that you have put out and looking at how this product is structured, it would be virtually impossible for a lot of people or at leas the larger entities to issue participatory notes?
I think what we are hearing from a large number of people that are in the market registered as FIIs, some who are smaller members - smaller issuers in the P-Note issuers club, is that they do not see any difficulty.

Will you really take suggestions on board or has it just been done as a formality?
If we did not want to take suggestions on board, we would have issued a final thing yesterday. SEBI is a consultative organisation. Even though some measures are urgent, we would still attempt widespread consultation, not talking to five people or 10 people in a private corner. That is why we put it on our website, and we hope there will be informed discussion and debate and not uninformed discussions driving the investors who might get scared.