Tuesday October 16, 11:45 PM
India considers curbs on foreign inflows to shares |
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By Prashant Mehra and Hiral Vora
MUMBAI (Reuters) - India's stock market watchdog proposed on Tuesday urgent curbs on the flow of foreign funds into shares through instruments known as participatory notes, a move analysts said aimed to cool the market and calm the rising rupee.
A surge of foreign funds into Indian shares has helped send the benchmark index to its 18th record in 19 straight sessions and driven the rupee 12.5 percent up against the dollar this year, complicating monetary policy and currency management.
The Securities and Exchange Board of India (SEBI) said on its Web site that after consulting the government it was recommending changes in policy on participatory note (PN) issuance and set a deadline of Oct. 20 for any comments on the proposals.
"The year-on-year increase in offshore derivative instruments (ODI), the anonymity that the ODI provides to the investors and the copious inflows into the country from foreign investors has been engaging the attention of the government and regulators," it said.
Analysts said the move was to deter "hot money" flowing into the world's fastest-growing major economy after China and the proposals, announced after market hours, were likely to take the steam out of the stock market when it opened on Wednesday.
"People are long and overbought, and this could result in some unwinding of positions. The market could slip by 1,000-1,500 points, in the worst case," said Deven Choksey, head of KR Choksey Shares & Securities.
The benchmark 30-share BSE index ended flat at 19,051.86 on Tuesday after hitting a record of 19,174.45 in the session.
THE MEASURES
Foreign institutional investors (FIIs) registered in India can buy Indian securities and then issue participatory notes to foreign investors who are not registered with the regulator.
Foreign portfolio inflows to Indian shares have jumped $4.6 billion this month, taking the total in 2007 to a net $17.6 billion, well above a record $10.7 billion in the whole 2005.
SEBI said the number of FIIs and/or sub-accounts issuing overseas derivative instruments had more than doubled to 34 from 14 in March 2004.
The notional value of PNs had rocketed to 3.5 trillion rupees ($89 billion) in August from 318.8 billion rupees in March 2004.
SEBI proposed that FII sub-accounts should stop issuing PNs and should wind up their positions over 18 months.
FIIs themselves should immediately cease issuing or renewing PNs on underlying derivatives. FIIs could continue to issue other PNs but this would be limited by the value of notes outstanding relative to their assets under custody in the country.
Participatory notes have provoked controversy in the past but previous debates have not resulted in strong action.
The BSE index has risen 38 percent so far this year, gaining 21.6 percent since the U.S. Federal Reserve cut interest rates on Sept. 18. The central bank has been intervening heavily in the foreign exchange market to try to counter the upward pressure of inflows on the rising rupee .
"SEBI is attempting to bring some sanity into the market and discourage short-term foreign money flowing into the country to capitalise on an appreciating rupee," said Nikunj Doshi, strategist at Envision Capital, an investment advisory firm.
"The biggest worry is rupee appreciation and SEBI is trying to put a cap on all this hot money."
(Additional reporting by Himangshu Watts)
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