Sebi might ease stand against p-notes in F&O READY RECKONER

Regulator may not stick to pure hedging; could allow cross-sectoral hedging

The Securities and Exchange Board of India (Sebi) is likely to take a less stringent approach in banning participatory notes (p-notes) from the derivatives market.

According to sources, the regulator may not stick to the pure definition of hedging and allow cross-sectoral bets.

Last month, Sebi had proposed to ban p-notes from taking naked positions in the derivatives segment. This means a p-note investor will be allowed to deal in the derivatives counter of a stock, say Reliance Industries, only if the investor owns the underlying stock in the cash segment.

The proposal faced opposition from foreign investors, who made representations to the markets regulator expressing concerns about the move. Sebi is likely to take a final call at its board meeting on Wednesday.

Sources say Sebi could give more leeway deciding what construes hedging. For instance, an investor with exposure to high-beta banking stocks can be allowed to go short on defensive bets such as consumer goods or in technology. Although hedging typically means going long and short on the same stock or sector, some investors use advanced strategies for minimising risks. “Numerous industry bodies, including FII (foreign institutional investor) lobbies, have expressed concerns about imposing a blanket ban on naked positions. They have explained crosssectoral hedges are a prominent part of strategies globally to minimise risk. Hence, the regulator should give some leeway. Sebi has assured it will consider the issue,” said a source.

However, the regulator is unlikely to give any relaxations when it comes to cross-country hedging. In this strategy, investors buy shares of a country to minimise the risk that could arise due to their exposure to a different country. For instance, investors who are long on China could go short on India for hedging. This proposal was floated by Sebi to curb speculative trading, which could increase volatility in the markets. Sebi had floated a discussion paper on p-notes last month which also included the proposal to levy $1,000 on each offshore derivative instrument (ODI) subscriber. The Alternative Investment Management Association (Aima), the global representative of hedge fund sector, has written to Sebi that its proposals could kill liquidity in the Indian markets. “We are concerned that Sebi’s proposal would negatively impact the ODI futures market and have unintended consequences for Indian capital markets. In particular, we envisage that a number of key informed investors would leave the market and this will reduce liquidity and affect accurate price formation,” said Aima in the letter.

To bar p-notes from taking unhedged positions in the derivative markets. Existing users to wind up their naked positions by December 2020

To curb speculative trading and thereby check volatility in the market

Hedging might not always be done by going long and short on the same stock. Investors employ complicated strategies to minimise risk, which includes cross-sectoral hedging

Sebi might allow investors to use exposure to one sector as a hedge for exposure to another sector

Likely on Wednesday at Sebi’s board meeting