Investment banks can still sell P-notes to their hedge-fund clients as long as the underlying securities are stocks - and not derivatives - though the value of notes can no longer exceed 40 percent of the registered investor’s assets under custody.
Effectively, this is what the government is telling foreign investors: "We know we can no longer choose who gets to invest in India and who doesn’t without banning P-notes; and we won’t do something as drastic as that because that’s going to hurt us. But allow us some control on the pace at which you are going to bring in money; without that, we’re heading for a blowup."
It’s a message the market can understand.
After all, influential voices in India have begun discussing the possibility of a Thai-style lockup on foreign inflows. Thankfully, the Indian regulator’s plan isn’t nearly as ugly as that.
