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Sebi sleuths zero in on FII sub-accounts

Rakesh P Sharma & Janaki Krishnan

In its ongoing investigations into the market crash of March this year, the Securities and Exchange Board of India officials have now turned to the sub-accounts of foreign institutional investors.

Sebi officials said trading particulars of select FIIs are being sought from custodians with a view to ascertaining how they could have contributed to the sell-off in the market and their trading patterns.

The investigations will revolve around how funds have been channelled through the sub-account route to Indian market through Indian brokerages - in particular Sebi with the help of the enforcement directorate is probing Mauritius-based accounts.

Since slush funds are also suspected to be involved, the scope of the probe will track all overseas funds who invest on behalf of sub-accounts.

According to Sebi information during the time just prior to the market turmoil, 81 per cent of the FIIs have given buy recommendations in key scrips, 10 per cent sell and the remaining 9 per cent have recommended hold.

FIIs who are asset management companies, investment advisers, nominee companies, institutional portfolio managers, trustees and banks can invest on behalf of sub-accounts. Under Sebi regulations a sub-account of a FII should be an institution or fund or portfolio established or incorporated outside India.

This fund or portfolio is required to be "broad based". To qualify as "broad based fund" the fund or portfolio should have at least 20 investors, with no single individual investor holding more than 10 per cent of the shares or units of the fund or portfolio.

Foreign corporates and foreign individuals can also be registered as sub accounts but they need not be "broad-based". The FII through whom an application is made for sub-account registration should be authorised to manage investments on behalf of the sub-account.

If the broad based fund has institutional investors it shall not be necessary for the fund to have twenty investors, provided that if the broad based fund has an institutional investor who holds more than ten percent of the shares or units in the fund, then the institutional investor must itself be a broad-based fund.

However a fund or portfolio which is already registered as sub-account of a FII or is itself registered as the FII is not permitted to be registered as sub-account of another FII.

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