What FIIs want from Sebi ???

[pratikbharti]

Stung by Sebi's proposals on the participatory note issue, foreign institutional investors say the regulator need to simplify the registration procedures.

They are currently cumbersome and create roadblocks for many genuine and long-term investors.

"We know of many cases where the registration was taking much longer than anticipated. As a result, the investors either went to other markets or have been investing through the PN route," said an advisor to FIIs, on condition of anonymity.

Consider the case of an FII, he noted, which was an investment arm floated by the government. It wanted to come and invest in the Indian stock market, and even filed for FII registration.

Sebi first objected saying it should have a three-year track record but the investment arm was set up just a year ago by the government. Sebi, he further pointed out, then demanded that the FII should have at least 20 investors. How can a government investment arm have investors? "Consequently, the frustrated FII decided not to register," he added.

This is not a lone case. Many FIIs have been complaining about the procedures which are time consuming and ask for irrelevant details. As another advisor pointed out that "registration procedure is just one thing.

There are other issues. The tax authorities, for instance, can open books even after five years and questions by them can worry foreign investors."

If they come through the PN route, such issues do not arise as in many cases, such notes are issued abroad, he reasoned.

In May 2004, before the UPA government assumed office, the market had touched the lower circuit. After that, some FIIs were asked to clarify if they had intentionally sold shares to bring down the market.

Apart from this, foreign investors who are global investors do not prefer cumbersome compliance norms for want of time and cost issues. They also want stability in policies.

"Foreign investors need stability in regulatory practices. Today the market has fallen because of fear rather than the transactions as there were some uncertainties in the minds of foreign investors," said Pradeep Shah, chairman, IndAsia venture capital advisors.

Regulating PNs are important when the country has some restrictions on foreign investments. Countries having full capital account convertibility do not need FIIs to even register.

Whenever there are restrictions, investors prefer other routes and the use of offshore derivative instruments like PNs become the order of the day.

A representative from a leading FII said on the condition of anonymity noted that in recent weeks, many US based first-time investors and hedge funds were investing through the P Note route as they were impatient to wait till they get the registration.

The momentum in the market, according to him, was such that many were thinking that they might miss the bus if they don't invest in India.

But Sebi was more worried by PNs issued for investment in derivatives. FIIs sub accounts were issuing PNs and also PNs for derivatives. This was being leveraged by hedge funds.

Indians sending their money out too - or those who already have money out - were bringing it back through PNs. It is called Round-tripping. Sebi's surveillance department is investigating if promoters are involved in this kind of activities.

But all don't agree. Round-tripping is not easy. Siddharth Shah of Nishith Desai and associates said: "FIIs are required to provide an undertaking to the market regulator confirming that in case of P-Notes, the beneficial ownership of the underlying investments is not in favour of Indian resident/PIO/NRIs."

WHAT FIIS WANT

Simplified registration procedure

Get rid of interference from tax authorities

WHY PNs MATTER

Controls on capital account transactions and regulations on foreign investments tempt them to come through the P-note route.

 

[pratikbharti]

270 FIIs await Sebi nod

Over 270 applications from foreign institutional investors (FIIs) are awaiting the Securities and Exchange Board of India's (Sebi) clearance as the debate on the speedy clearance of registrations by the capital market regulator rages on.

In fact, during the last one year, the Sebi has cleared a total of 141 applications, an average of about 12 registrations a month.

12 CLEARANCES A MONTH

• Number of registered FIIs as on Oct 18: 1,113 vs 972 FIIs in same period - an average of 12 clearances a month
• Number of sub-accounts with FIIs: 3,445 vs nil during last year
• Applications pending for FII registrations with Sebi: 270-plus
• Some of the hedge funds that received clearance recently: Italy-based Alett i Gestielle Societa, Toronto-based DGAM Emerging Markets Equity Fund, Karma Capital Management and Blackrock advisors

Significantly, the number of sub-accounts skyrocketed from zero to 3,445 during the last one month, according to the Sebi data. The number assumes significance in the wake of the Sebi proposal to clamp down on foreign inflows through the participatory note (PN) route.

Sebi sources said it was streamlining the registration process for both FIIs and their sub-accounts in a move to encourage direct inflows from foreign investors into the country's equity markets.

In a discussion paper issued late on Tuesday, the Sebi proposed policy changes on the offshore derivative instruments (ODIs), popularly known as PNs, and asked feedback from market participants.

The Sebi board, which is meeting next Thursday, is expected to announce the new regulations. Sebi sources said institutions or hedge funds investing through sub-accounts would now have to register themselves as FIIs. The regulator would freely permit them to invest in Indian stocks directly, provided they furnished all details and fulfilled all the regulatory criteria.

"We will see sub-accounts getting phased out eventually," said a top official of a brokerage house. There are close to 1,000 FIIs registered with the Sebi, of whom about 300-350 are reasonably active. Market participants point out that most of the funds coming through P-notes are from hedge funds (30 per cent), which want to trade in the Indian equities without registering with the Sebi.

"A PN structure is a tax on any of these foreign institutional investors (hedge funds or others who invest through P-notes) as they pay a transaction cost of 0.4-0.5 per cent to these FIIs, who are registered with the Sebi. Since the registration process is tedious and they may not fulfil the Sebi criteria, they pay this fee. Most of the institutions coming through the PN route are legitimate investors. But they may not fulfil the Sebi criteria or they don't want to go through all the hassles," said Alok Sama, founder and president, Baer Capital Partners, a hedge fund.

Although it is undisputable that hedge funds have a very legitimate role in the market, Sebi sources said they expected hedge funds to bring in more transparency.

 

[pratikbharti]

Sebi clears 16 FII applications

Market regulator Sebi cleared 16 FIIs for registration on Monday. Announcing this Sebi chairman M Damodaran said all FII applications pending as on October 17 have been cleared

The Sebi board has cleared new categories of FIIs; they will be put on website shortly. Sebi has received a large response from both India and abroad on its proposals to restrict Participatory Notes.

The 18-month time frame given for FIIs to wind up derivatives-based P-Notes is enough, Damodaran said.