Bloomberg – As hedge funds from across the world shower riches on Indian stock markets, all that the country’s central bank can worry about is how to stop them.
Without hedge funds the benchmark Mumbai Sensex probably wouldn’t have scaled the peak of 10,000 as effortlessly as it did last week. The Sensex surged to a new record of 10,173.25 yesterday, a 52 percent gain from a year earlier.
M. Damodaran, chairman of Securities and Exchange Board of India, or Sebi, told me in Singapore yesterday that 48 percent of the so-called foreign institutional investment that has taken place in Indian markets has been through offshore participatory notes, the only instrument legally open to hedge funds.
That compares with 35 percent at the end of February 2005, and 26 percent in September 2003, when Sebi, the regulator, began compiling monthly data on the contracts.
P-notes, as the derivatives are called, are issued to those overseas investors who aren’t eligible to buy stocks directly in India by those that are. The first group includes mostly hedge funds. The latter category comprises international investment banks such as Citigroup Inc., Merrill Lynch & Co., Goldman Sachs Group Inc. and UBS AG that are registered as foreign institutional investors in India.
The issuer buys and sells the local share behind the derivative on behalf of the P-note holder, who avoids having to appoint a custodian and hire an accountant to file local tax returns in exchange for paying a slightly higher brokerage fee.
