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Lack of guidelines hamper FIIs' derivatives entry

Sangita Shah

The Securities and Exchange Board of India's idea of institutionalising the bourses looks like coming to a naught. The reason-- lack of institutional participation and especially the foreign institutional investors.

FIIs are yet awaiting clarifications in regard to various issues relating to FII participation in the derivatives market. "Lot of questions are yet to be answered before FIIs can really enter into the derivatives market," Brian Brown, managing director and head of equities, Salomon Smith Barney said.

FIIs are not yet sure whether they can write options or whether they can even sell short in futures. "According to the RBI guidelines, FIIs can hedge against their current equity exposure but cannot sell short in the derivatives segment. Here is where the confusion is. FIIs which have been allowed to deal in equities only on delivery basis, which effectively means that they are long in the cash market. To hedge this long positions, they need to only sell short either in futures of options segment. But here again this is not permitted under the regulations. So how are FIIs supposed to hedge their positions?" chief executive officer of another leading foreign brokerage asked.

He even accused the Sebi of creating an artificial market environment. The markets regulator does not practice what it preaches, he said. "If the Sebi really wants institutional participation, it should come out with specific clarifications and provide level playing field before introducing the new system."

There are other issues of taxation also involved in the reasons detrimental to institutional participation. Moreover, the existing investments of FIIs do not have a mandate to invest in derivatives segment. FIIs will need to get back to its investors and get permission to trade in derivatives instruments in India or float new schemes having a prior approval for such investments.

According to Darshan Mehta, chief executive officer, Moneypore.com, "FIIs have traditionally been followers of domestic investors and they do not take a lead. FIIs would rather wait for a while and test the waters before taking a plunge."

However, dealers at derivatives trading terminals of few foreign brokerages were hopeful. "I am certain that FIIs will play in a big way in the derivatives market. The volumes are picking up in the index futures segment and if one goes by last months trend, it would not be long before FIIs enter in a big way," a dealer said.

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