Hedge funds want front-door entry

Tired of operating in India through participatory notes and as sub-accounts with foreign institutional investors, hedge funds are now looking for an entry into the Indian markets through the front door.

Hedge funds, which cannot get registered in India in the absence of proper guidelines, will discuss the India strategy at a two-day Asian Hedge Forum meeting in Hong Kong on October 17-18.

"The objective is to have codified entry norms for these funds in India," sources close to the development said.

This marks a shift from the original stance of these funds, which have all along been resisting any plans to regulate them as they do not play with small investors' money. Hedge funds are "lightly regulated" private investment funds, characterised by unconventional strategies to earn maximum return on investments.

The Hong Kong meeting will also discuss the need for supervision of the global hedge fund industry through a painless process. Pasupati Advani, who is advising Avatar Investment Management, an India-focussed hedge fund, and another executive of an Indian brokerage will speak at the conference.

Avatar has three India-focussed funds: an absolute return fund, which bets on single stock futures; an opportunities fund; and a growth fund investing in less liquid stocks.

"In the absence of clear regulations, it is difficult for even long-only hedge funds to enter the Indian market," said Anoop Narayanan, partner of law firm Majmudar & Co, which is advising on behalf of a US-based hedge fund for an India entry.

According to him, the Securities and Exchange Board of India (Sebi) should allow the hedge funds entry into India for a one-year period and renew the licence after reviewing their functioning.

The Sebi guidelines on foreign institutional investors (FIIs) do not have regulations relating to hedge funds but applications for new FII registrations are scrutinised to ensure that FIIs are not channelling hedge funds' money.

Recently, Kuvera Capital, shortlisted for the best Indian hedge fund 2006 by Eureka Hedge, a global hedge fund tracking outfit, received approval to operate from Dubai International Financial Centre.

This development reflected the change in approach by hedge funds, said RE Sandy Shipton, head of asset management at Dubai International Financial Centre.

Hedge funds normally prefer to be unregulated and operate from tax havens such as Mauritius. "Compared to tax havens like Mauritius or the Cayman Islands, we offer an internationally-recognised regulatory regime. There is also zero tax on company profits and repatriation of capital," Shipton told Business Standard.

Another hedge fund registered with Dubai International Financial Centre, which comes under the regulatory purview of the Dubai Financial Services Authority, is Argent Financial Group.