On Friday, the Sensex rose 2.5 per cent despite the Securities and Exchange Board of India’s (Sebi) move to curtail the entry of unregulated foreign funds. Moreover, India’s stock market showed a higher monthly gain than China’s to be among the fast growing stock markets in Asia by showing an increase of 11.58 per cent against the latter’s 11.50 per cent rise, as per Morgan Stanley Capital International (MSCI) Barra’s calculations.

True, the Sensex crashed 1,500 points in three days soon after Sebi proposed the ban on unregulated participatory notes (P-Notes) on October 16. However, it recovered by 1,683 points last week, with more than one-fourth of the rise coming on Friday after Sebi operationalised the proposals on Thursday evening.

Is the market ignoring the regulator’s move of imposing curbs on P-Notes? Especially when Sebi itself admitted that half of FII investments are through PNs? The reason for the continuing exuberance in the market could be that the regulator has opened several “front doors” while shutting the “back door” to foreign investors. Many US-based hedge funds, which are not regulated in their own country, won’t be able to invest in Indian markets as the Indian regulator has stipulated that only funds that are regulated in their own country will be allowed to issue P-Notes for investments in India.

However, Sebi’s move making it easier for FIIs to come in through the front door — like permanent registration, changing the track record norms, and bringing new categories of foreign investors like pension funds, universities and charitable societies — will neutralise the impact of the P-Notes proposals to some extent.

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