SEBI sticks to its guns, no P-Notes from sub-accounts and no P-Notes against derivatives. But SEBI also opens the front door wider, allows easier registration of sub-accounts.

While it is not going to allow sub-accounts to issue participatory note or allow participatory notes based on derivatives, it has relaxed some of the rules on who will be registered as FIIs.

The SEBI's final rules that will govern participatory notes is not majorly different from the draft rules it announced on Oct 17. As in the draft, the final rules ordain that sub-accounts of FIIs can't issue participatory notes hereafter. And they will have to wind down what they have issued in 18 months.

Also SEBI has maintained that PN’s issued with derivatives as underlying won't be permitted hereafter and those issued will have to be wound down in 18 months. As for full fledged FIIs, their status remains as in draft. They cannot issue PN’s more than 40% of their assets under custody. Those above this level can stay put, but can issue fresh notes only against cancelled ones. Those below the 40% limit can incrementally issue PN’s upto 5% of their assets till they hit 40%. The cut off date for assets under custody will be September 30.

Since sub-accounts have been banned from issuing PN’s, foreign investors were keen to know if they will be helped to register as full fledged FIIs through a more liberal definition. It has said that if funds don't have a one year track record to register, it will suffice if the fund manager has such a record.

While as a rule, only entities regulated in the home country will be allowed to register as FIIs in India entities like, charitable trusts, university funds, pension funds, endowments and foundations will be allowed to register even if unregulated
SEBI has also modified its broad based criteria to include those where one investor has more than 49% of the holding. So far, one investor could not have more than 10% of the holding. To ensure an easy transition into the new order, SEBI said that
Sub-accounts that have already applied for registration as FIIs after the Oct 16 proposals, will be treated as FIIs and allowed to do business, till SEBI finally registers them.

In a sweetener to foreign investors, Damodaran also said that henceforth, FIIs need to renew their register not every year but once in 3 years. However, what might prove to be the bugbear of foreign funds will be SEBI's clarion requirement that PN’s can be issued only to regulated entities and only to regulated can register in India.