Hedge funds can continue to operate through the participatory note route if only "it does not disturb the integrity of the market", Securities and Exchange Board of India chairman G N Bajpai told Business Standard.

Also Read The Sebi story

In an exclusive interview, the Sebi chairman also hinted that Sebi may review its decision to push for the T+6 settlement system for book-built primary issues.

Market participants had said the time period was not feasible in the Indian context since the banking system took a long time to clear funds.

"We are here to facilitate the market. Our policy must be implementable and must add to the efficiency of the market. We feel that to improve efficiency, the T+6 system is desirable. But if operators find it difficult I am prepared to look at the issue," Bajpai said.

Bajpai also implied that Sebi may also go slow in revising Clause 49A of the listing agreement, which proposes to restrict the tenure of non-executive directors to three terms of three years each.

Sebi has been collecting market data on the operations of hedge funds using the PN route. Hedge funds, like overseas pension funds and university funds, are not allowed to operate directly in the Indian markets.

But it is an open secret that hedge funds have been active in the Indian markets through the PN route.

This essentially means that they buy offshore contracts, giving them quasi-ownership rights to underlying securities in India.

Since no foreign exchange crosses Indian borders, such transactions are not reported to any authority or regulator.

Earlier last month, Sebi sought to clamp down on the PN route by asking registered FIIs to disclose the identities of all entities to which they had issued PNs.

But Bajpai's statements suggest that the regulator will like to examine the extent of this practice before taking a final view on clamping down on PNs.

"Today they (the hedge funds) are not allowed to participate in Indian markets and we don't propose to allow them to participate (directly). There is a provision on the participatory note... We will examine (that)... Even the JPC has said we must verify it. So long as it does not disturb the integrity of the market, it's fine.

"Only about a month back we had asked for information and have given them 15 days to supply the information. Before I allow anybody to enter into the market I must ensure that my risk management measures are effectively in place," Bajpai said.

Bajpai also said Sebi was confident about nailing Alliance Capital's former chief investment officer Samir Arora on insider trading charges.

He added: "Globally it is accepted that it is very difficult to prove insider trading. We are fairly certain of our ground," he said.