Financial Daily from THE HINDU group of publications
Thursday, Dec 11, 2003
Foreign Institutional Investors
Issue of participatory notes by FIIs SEBI to probe OCB-NRI fund link
Kolkata , Dec. 10
THE Securities and Exchange Board of India (SEBI) is determined to get to the bottom of some transactions in participatory notes (PNs) issued by a few foreign institutional investors (FIIs) registered in the country.
The regulator suspects that a few overseas corporate bodies (OCBs), funded by non-resident Indians (NRIs), have indulged in trading of these PNs.
The SEBI Chairman, Mr G.N. Bajpai, told Business Line here that the market regulator suspected that there might have been some OCB-NRI fund link in certain participatory notes issued abroad by a few FIIs registered in India.
A SEBI study on the FII investments till September 30 had raised the suspicion that some OCBs, which traded in participatory notes issued by overseas associates/parents of India-registered FIIs, could actually be funded by NRIs or even by Indians through proxies.
Some 12 FIIs, which had issued participatory notes (outstanding as on September 30), earlier "confirmed" that they or their associates or clients had not issued PNs to NRIs and to OCBs, either directly or indirectly.
"We will use all our regulatory means to get the trading details through different layers of funding. These FIIs will come round soon. It is not as if they are stonewalling; but as such deals often go through various complicated routes, including a maze of sub-accounts located in various foreign countries, it is not always easy to track the ultimate source of the fund," Mr Bajpai added.
Last month, the stock market regulator had issued a statement that the data available with it till September 30 "do not warrant or support any inference that NRIs have contributed a substantial percentage of the outstanding FII investment".
There is a nagging suspicion in market circles also that an NRI-OCB nexus is again at play in the garb of FII flow during the current bull run.
According to SEBI estimates, the total value of underlying investment in 200 equities through PNs issued till September 30 was Rs 19,125 crore.
Though FIIs registered with SEBI are bound to give details of their direct investment in India, the investments through PNs (a kind of legally accepted derivatives in many overseas markets and not a legal instrument of trading in India), do not strictly fall in the regulatory domain of SEBI. As they follow applicable overseas rules and practices, it is difficult for the Indian regulator to coax FIIs present in the local market into divulging trading details on an instrument issued mostly by their overseas associates or parents.
On the other hand, by definition, OCBs include overseas companies, partnership firms, trusts, societies and other corporate bodies owned either directly or indirectly to the extent of at least 60 per cent by NRIs. These private outfits are virtually unregulated either by Indian authorities or by authorities of the foreign lands where they are registered. The concern for domestic market is that the OCBs had an important role in rigging the prices in 2000-01.
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