MUMBAI, India (HedgeWorld.com)--The comment period has ended on an Indian government agency's proposal to allow foreign hedge funds to operate in India's securities markets under certain restrictions.
On May 24, for comment through June 8, the Securities and Exchange Board of India published a report on hedge funds, acknowledging that there are skeptics who believe they ought to be excluded due to the role large hedge funds may have played in the East Asian financial crisis of the 1990s.
"However," SEBI said, "subsequent research could not produce robust evidence implicating the hedge funds for precipitating the crisis." Furthermore, hedge funds bring greater liquidity to a nation's markets and increase the risk-management options for their counter-parties.
The report was prepared by SEBI's office of foreign institutional investment and stressed that it didn't propose letting such funds "mobilize investment from India by offering their products to Indian investors. Therefore, regulatory issues related to investor protection have not been considered in this report."
Some hedge funds already participate in India's economy indirectly, through investing in offshore derivative instruments issued against underlying Indian securities. But SEBI concluded they should be able to participate in a more transparent and orderly manner, upon application, if they satisfy four conditions:
- that the investment adviser to the applicant hedge fund must be regulated under the relevant Indian statute;
- that at least 20% of the assets under management by the applicant be the contributions of institutional investors, who are expected to take a longer-term view of the market than high-net-worth individuals;
- that the fund be broad-based, i.e. that it have at least 20 shareholders and that no one shareholder own more than 10% of the shares or units;
- that the investment adviser must have experience of at least three years of managing funds with similar investment strategies to that the applicant fund has adopted.
For purposes of its report, SEBI defined hedge fund as "unregistered private investment partnerships, funds or pools that may invest and trade in many different markets, strategies and instruments ... and are not subject to the same regulatory requirements as mutual funds."
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