World Bank OKs $400 mln for small firms in India!

WASHINGTON (Reuters) - The World Bank on Thursday approved $400 million in funding to help small and medium-sized enterprises in India cope with the global credit crisis.

The loan will be made to the Small Industries Development Bank of India (SIDBI), which will make available financing to small and medium-sized companies that are finding it hard to get access to credit. It will also go toward refinancing banks and other institutions that lend to small and medium-sized enterprises, known as SMEs.

"This project is part of a larger program of support in response to the government of India request for funding in light of the financial crisis," said Roberto Zagha, World Bank country director for India.

"It is targeted particularly at SMEs, to help address the credit slowdown that has resulted from the financial crisis," he added.

Zagha said credit growth to SMEs has fallen over the last year, which has affected overall growth and development.

What are p-notes? - restiction on which caused SENSEX to fall 1744points on 17th Aug,2007 and Market closed for an hour!

The 30-share index, SENSEX; which reached a life-time high this week, crashed 1744 points, after the SEBI put up its suggestion late on Tuesday evening. The market was closed for an hour. The p-Notes are said be behind the hugh surge in foreign inflows, which caused the latest market rally. "The steps taken by SEBI are in the right direction," the Finance Minister P.Chidambaram said. The Securities and Exchange Board of India (SEBI) on Tuesday proposed to tighten the rules for purchase of shares and bonds in Indian companies through the participatory note (p-Note) route. The move is aimed at arresting the surge in foreign inflows through p-notes.

So, what are these p-notes? Why such a havoc about them? What makes them so special? P-Notes are financial instruments used by investors or hedge funds that are not registered with the Securities and Exchange Board of India to invest in Indian securities. Indian-based brokerages buy India-based securities and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the investors. Participatory notes are like contract notes. These are issued by FIIs to entities that want to invest in the Indian stock market but do not want to register themselves with the SEBI. SEBI was not very happy about participatory notes because they have no way to know who owns the underlying securities, it feared that hedge funds acting through participatory notes will cause economic volatility in India's exchanges.

I feel that this step taken by the SEBI is good step towards improving clarity of FII investments. Many are saying this should have been done a lot before, say 6-7 years back. But at that time p-notes were not that much a highly weighted investment instrument by the FII. As a report says "the notional value of PNs has zoomed from 20% of FII/sub-account assets in March 2004 to 51.6% in August 2007, in other words from Rs 31,875 crore to Rs 3,53,484 crore!". While FIIs were net investors to the tune of $8.5 billion during the last calendar year, expectations are that they would invest close to $12 billion this year. This would take the market's exposure to P-Notes to over $5 billion, if the same ratio were maintained for the next three months.

What exactly were the restrictions put by SEBI on p-Notes - check out in next post.