In a significant step towards market reforms, the Securities and Exchange Board of India is considering sweeping changes in the norms governing the participation of foreign institutional investors in the securities market.

The entire framework is undergoing a comprehensive review and the regulator is expected to shortly put out a policy paper and ask for public comments.

The most important move under discussion relates to doing away with registration of FIIs. The move, if implemented, will mean that any foreign investor can enter the market directly and work through custodians and brokers to do business.

At present, high net worth individuals or institutions, who wish to enter the market without registration, have to approach a registered FII to invest through the participatory note (P-note) route. These notes are issued by FIIs which are already registered with Sebi. The thinking in topmost circles is to allow FIIs to enter directly without registering with Sebi.

Last week, the market regulator discussed the issue of removing the distinction between foreign direct investment and foreign institutional investment at a meeting of the high level co-ordination committee, which included Reserve Bank of India [Get Quote] and finance ministry officials.

The suggestion was that since those who invest through the FDI route don't go through the registration rigours, removing the distinction between FDI and FII investments will automatically imply that FIIs also need not go through registration.

Market experts, however, said even if Sebi does away with the registration process, FIIs would still have to be registered with some market intermediary, such as the custodian. Custodians, on their part, would have to ensure KYC (know your clients) requirements and keep a record of transactions.

Another option that could be considered is widening the criteria governing FIIs if removing the registration requirement is not feasible.

Last month, the regulator had removed a host of curbs on indirect investments by FIIs, including those on issuing P-notes, where the underlying asset is a stock or a derivative instrument listed on the Indian exchange. Sebi had also decided to limit the percentage of P-notes to total assets that an FII could issue.

The regulator had scrapped the rule which stipulated P-notes could account only for up to 40 per cent of the value of assets held by a foreign fund.