An ETN Behaving Badly: INP

Includes: IFN, IIF, INP
by: Greg Newton

And Barclays doesn’t win any transparency points:

(Click to go to the source)

A butterfly—or, more precisely, the Securities and Exchange Board of India—flaps its wings in New Delhi, and a few weeks later, the iPath MSCI India ETN (NYSEARCA:INP) is trading at a premium, fast heading toward 25 percent of its underlying value. INP closed Monday at $107, a mere 22.3 percent above its ‘daily indicative value.’ Which is a nice little bonus for anybody who bought the fund before late October, and a potentially nasty surprise for more recent purchasers.

But those investors could be forgiven for having overlooked the problem. While the discrepancy, first reported by David Fry of ETF Digest late last week, is readily apparent on the iPath website, and on amendments to the prospectus, Barclays Capital does not appear to have thought the matter worthy of a press release.

The discrepancy has developed since India’s securities regulator moved in October to limit the influx of overseas capital into its stock markets, and the consequent appreciation of its currency. While holding out the promise of a regulatory overhaul that would increase investor access and market transparency, the board banned the issuance of so-called “participatory notes” based on equity derivatives, causing a short-lived dip in the Indian market.

Barclays suspended issuance, sales and lending of INP on Oct. 26, citing the need to clarify the nature and impact of the new SEBI restrictions; on Nov. 5 it reopened for business—although hardly. Issuance remains suspended, sales are being made from inventory “to the extent, but only to the extent” that iPath shares previously sold have been redeemed, while lending is limited “to the extent, but only to the extent” previously loaned “shares have been returned to or acquired by Barclays.”

So, Economics 101: continuing strong demand for INP, in the absence of normal gravitational forces such as new issuance, combined with the inability to borrow stock for shorting, has sent the shares into low earth orbit. Where they may well remain for the foreseeable future, until either that fine frosty Friday when the Indian government completes its regulatory overhaul, or the 18-month period granted to wind up existing participatory notes comes to an end.

The decision does not appear to have had a significant impact on other ‘pure India’ ETFs available around the world. iShares, the Barclay’s affiliate that runs its conventional ETF business, lists an MSCI India ETF in Singapore and Hong Kong, while Lyxor, the Société Générale subsidiary, offers an MSCI India-based product in Europe, and another based on an S&P index in the UK. While in total just a fraction of the size of the $1 billion-plus US-listed product, a cursory examination of their recent behavior shows no significant disturbance in the relationship between the ETFs’ prices and their underlying NAVs.

Ironically, the best-known US-listed closed-end funds are currently trading at a discount to their NAVs. Blackstone’s $2.24 billion (at Jun. 30) India Fund (NYSE:IFN) carried a 7.78 percent discount on Friday, Dec. 7, according to Nuveen’s ETFConnect, while Morgan Stanley’s $1 billion India Investment Fund (NYSE:IIF) was trading at a discount of just under five percent. While both funds traded at a sometimes significant premium in the 18 months leading up to INP’s appearance in Dec. 2006, they have spent most of this year at double-digit discounts.

Market Comment
by David Fry
ETF Digest, Dec. 6 2007

India Market Regulations Close a Door, Open Others [$$]
by Jackie Range and Romit Guha
The Wall Street Journal, Oct. 26 2007

iPath MSCI India Index ETN

iPath MSCI India Index ETN—Prospectus

India Fund—IFN

Morgan Stanley India Investment Fund — IIF

Positions: Long IFN