As expected SEBI has announced the P-NOTE policy. They have said that:-

  1. FIIs would have to unwind offshore derivative instruments within 18 months.
  2. FIIs and sub accounts cannot issue P-Notes with underlying as derivatives.
  3. ODIs linked to stocks should not exceed 40% of assets under custody as of 30/Sep.
  4. The regulations come into effect from Oct 25 close of trade.


While SEBI is processing there applications, those who have applied for FII registration can continue trading.

It will not have any affect on the Indian Stock Market as it is in line what SEBI has announced earlier also. Still we cant ignore RBI's monetary policy on Oct 30 and Fed's monetary policy on Oct 31, now they will decide the movement of NIFTY (NSE) and SENSEX (BSE).

Outcome of P-NOTES:-


The SEBI board met on Oct 25 to decide on various issues, amongst them was the new policy on P-Notes. After the board meeting, SEBI had a press conference yesterday to announce the decisions taken by the board.

Final Policy What Is That?

  1. FIIs and their sub-accounts shall not issue/renew P-Notes with underlying as derivatives with immediate effect.
  2. 18 months is the period to wound up existing positions.
  3. Existing P-Notes expiring now/in future can be renewed, provided the renewal does not go beyond 18 months.
  4. FIIs/sub-accounts can invest in derivatives traded on recognized stock exchanges (there are some exchange traded derivatives in Singapore, etc.) but they cannot issue P-Notes based on such derivatives.
  5. Sub-accounts of FIIs cannot issue fresh offshore derivative instruments with immediate effect. Existing ODI issuing sub-accounts should wind up all the ODIs within 18 months.
  6. ODIs linked to stocks should not exceed 40% of AUC. Date for reckoning AUC is 30/Sep.
  7. Effective date of these regulations is from close of trade of 25/Oct/07.


The above is in line with what was announced earlier. Still registration  process has been liberalized. Changes in registration processes are :-

1. Broad based criteria: Earlier, SEBI had a condition that no single investor in a fund should hold more than 10% and there should be a minimum of 20 investors. This has now been changed - though the minimum number of 20 investors is required, no single investor should hold more than 49%.


2. Track record : It is okay if the fund manager has a track record of 1 year. This essentially allows new funds to register themselves as long as the fund manager has a track record.

3. Renewal of FII registrations would be done once in 3 years as opposed to annually as of now.


But one thing that SEBI has done is to bar FIIs from issuing P-Notes to unregulated entities. Which means that P-Notes can only be sold to entities that are 'regulated' in their respective jurisdiction, not just ones that are 'registered'. So, several hedge funds that are unregulated would not be able to participate in the Indian market through the P-Note route. But pension funds, foundations, endowments, university funds and charitable trusts would be recognized as a separate category (even though they are not regulated in their respective jurisdiction) and they would be allowed to register as FIIs.

After affects on Indian Stock Market :-

Everything is fine now. We can expect again bull run in Indian stock market. We can witness Sensex touching 20000-21000 mark  in very short time. Now the only issue left is weakness of dollar and rupees getting stronger along with Crude price touching sky.





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