Indian hedge fund investment issues

The big news in Asian investing over the last two weeks has been the decision by Indian authorities to halt investment in P-notes by hedge funds via their investment banks. The issue has a number of complexities but at its heart is the ability of the prime brokers to offer access to the Indian market to hedge funds.

The steps taken by the Indian Government have been justified by them saying that the large capital inflows this year were causing Indian exporters problems, that they needed to know who was investing in their stocks, that they want funds to come in via the front door not using P-notes.

Unfortunately this looks like the protectionist India of old. India has a an exciting future ahead as a huge country with a growing and educated middle class and a legal system that while far from perfect is actually considerably easier to understand and deal with than the Chinese system for most US and European firms.

All of the public statements thus far have tried to calm foreign investor nerves - and the announcements last night were important due to the way they seemed to put a final position on a number of issues - but actually SEBI has done little thus far to open the door to the fastest growing segment of the global asset pie, hedge funds.

Large foreign inflows will greatly benefit the Indian economy. Indian executives will be required to run and staff local operations. Firms will need premises, IT and all of the other basics needed to support a sophisticated investor. They say that for every job on Wall St two others are created to support it in Manhattan. I would suggest the ratio will be much larger in India.

The losers of course, if SEBI, the RBI and the politicians do truly open up their markets are going to be the entrenched owners of business enterprises be they old families that refuse to reform or government enterprises that are in need of new investment and technologies.

Right now the investing community loves India. It is up to the Indian government and its regulatory bodies to recognise and cultivate the relationship. Open the door to all types of foreign investment in listed firms.