Hedge funds face India exposure cap as Sebi readies guidelines

Mumbai: India’s stock market regulator Securities and Exchange Board of India (Sebi) will soon come out with guidelines regulating hedge funds that wish to operate here.

“We are looking to provide a broad-based, registered and regulated platform to these entities, depending on their individual track records,” said a senior official at Sebi who did not wish to be identified.

Among the measures being considered is one that will allow single hedge funds (those that have a single strategy or a single investor, and, therefore, a higher degree of risk) to invest only 49% of their investment corpus in India.

Hedge funds are aggressively managed portfolio investments that use strategies such as leveraging, and taking long (a bet that the underlying asset will appreciate), short (that the underlying asset will depreciate) and derivative positions in the markets in order to make high returns.

Several well-known hedge funds have already been granted entry into India.

Sebi’s previous chairman M. Damodaran had always maintained that the regulator was more comfortable with hedge funds coming into the domestic market through the front door, as entities registered with it. In October, Sebi had clamped down on anonymous inflows of foreign money into equities through so-called participatory notes (PNs).

According to the Sebi official, the registration of new hedge funds will be contingent on their track record. “In case of newly set-up hedge funds, they will be given an entry if the fund manager has a good one-year track record,” he said.

Since clamping down on PNs, Sebi has made it easier (and quicker) for foreign investors, including hedge funds, to register themselves with it. Some prominent hedge funds such as the Old Lane Llp (a Citigroup fund) have since registered their names with the regulator.

“We have registered around 200 foreign institutional investors in the last two months, among which there are at least 20 hedge funds,” the Sebi official said.