Hedge funds and participatory notes have always been a cause of concern for capital markets across the globe. This article looks into the regulatory aspects of the same in the Indian context.

The Indian equity market has grown and evolved over the years to attain global standards in trading technology, disclosure norms and investor protection. Depositories, electronic clearing and order matching and introduction of new products such as derivatives have improved the functioning of the Indian stock markets. The participation of retail and institutional players has increased thus, increasing the depth of the market. Retail participation has been significant through the mutual funds route, but the retail participation of foreign investors is not allowed and foreign investment has to be routed through registered Foreign Institutional Investors (FII).

Foreign institutional holding in the Indian capital market has risen to about 15% of the total market capitalization. But almost 45% of the foreign investments are through a mechanism called the Participatory Notes (PNs). Foreign portfolio investors access the Indian market in three different ways: a. As full-fledged FIIs b. As sub-accounts of a sponsoring FII and c. Through access products referred to as PNs, offered by FIIs.

Portfolio Organizer Magazine, Hedge Funds, Indian Equity Market, Indian Stock Markets, Foreign Institutional Investors , FII, Securities and Exchange Board of India, SEBI, Foreign Investors, European Central Bank, ECB, Long-Term Capital Management, LTCM, Securities Exchange Commission, SEC, Financial Services Authority, FSA, Regulatory Environment, Tarapore Committee.