India is one of the few regimes that restricts the entry of foreign investors, through a piece of regulation that defines who can be a FII. Hedge funds continue to not figure in that category. India is also one of the few regimes that prescribe a registration process. If the intent is to know and approve those who can invest in Indian markets, the surge in PNs only points to the inability of regulation to achieve this purpose. Those who would like to invest will do so anyway, and those who make money from such investors will continue to find innovative ways to enable them to do just that. It is now widely accepted that some of the money of our own, which was stashed away abroad, has managed to find its way back through these structures. Efforts to ‘find out’ the identity of the original investors may be tougher than currently envisaged. It is also not clear how knowing the identity of the investor would help in managing any stability and systemic risks issues that the regulators are most concerned about.

Anonymity in itself may not be an undesirable feature. It may also not be feasible to extend the information disclosure argument beyond a point when it comes to entities like hedge funds. While several have questioned the opaque investment strategies of hedge fund managers, investors seem to prefer them for the very same reasons, trying to get an edge over other strategies that are well known and publicised. Regulation can only extend itself to issues of default and solvency, and the threats to stability of markets from unexpected failures. Measuring these risks has been complicated by the creation of several sophisticated structures. The disclosure of ‘who’ is unlikely to lead the regulators into knowing, understanding and dealing with these complexities.

... contd.