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Govt nixes Sebi plan to scrutinise FII flows

Subhomoy Bhattacharjee & P Vaidyanathan Iyer

The government has rejected the Securities and Exchange Board of India's proposal for closer scrutiny and monitoring of fund flow from foreign institutional investors and overseas corporate bodies into the stock markets.

Justifying the government's stance, top officials said FIIs were conducting legitimate business and harsh measures would not only scare away foreign portfolio investment but also hamper foreign direct investment into the country.

The government is of the view that FIIs already face stringent disclosure norms in the country of origin and tracking their source of funds was tantamount to policing their operations. Moreover, given the quantum of foreign investment in India, any adverse signal would only prove counter productive.

Sebi is only trying to pre-empt censure of any laxity in its role as a regulator of the capital markets, said officials.

The market regulator had specifically pointed out in its interim report on stock scam the use of "participatory notes" mechanism by FIIs through which they entered into transactions on behalf of clients who are otherwise not eligible to invest in local markets but want to hide their identities.

In the agenda note of the high-level committee on capital markets, prepared by Sebi, it had already said the issue of participatory notes and the role played by overseas corporate bodies needed to be scrutinised. It had stressed the need for close monitoring to curb this practice.

The Union finance ministry has received representations from several FIIs that too much of supervision in what is essentially a legitimate trading activity would not do India's image any good when it is trying to attract FII and FDI.

The market watchdog had, in its report, brought to the government's notice the misuse of investment and automatic repatriation facility given to FIIs. Sebi's report also revealed that over Rs 30 billion inward and outward remittances were made by a clutch of OCBs, which were capitalised at incredibly low amounts.

Sebi has already written to the Mauritius Offshore Business Activities Authority to provide information on the Mauritius-based FIIs, which have opened sub-broker accounts in India. The regulator, which is close to completing its final report on the stock scam, intends to bolster its case of greater inspection of fund flow from Mauritius.

The government rejection of Sebi stance is interesting considering that the joint parliamentary committee on the securities scam is also expected to probe into the matter. Finance Minister Yashwant Sinha has already faced the ire of Parliament including his own party members over FIIs'/ OCBs' nexus with errant stock brokers more than once.

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