Sebi To Ease Regulations on FII’s
The Securities and Exchange Board of Indi (Sebi) the Indian stock market regulator is considering reforms and deregulating the norms governing the participation of foreign institutional investors in the Indian equity markets.
The framework for foreign investment in equities is going to go under substantial review, it is expected that the regulator will put out a consultative policy paper asking the public for their comments on the proposed de-regulation.
The most important proposal being considered is eliminating the need for foreign institutional investors (FII’s) to register with the regulator. This would mean that any foreign investor could enter the market directly, working with local brokers, market makers and custodians.
Currently the regulations are such that High Net Worth Individuals (HNI’s) or FII’s who wish to buy and sell Indian equities or have exposure to the asset class must register with the regulator which is an arduous process. If they wish to buy Indian Equities without registering, they must then approach a registered FII and take exposure to a particular equity or equities using participatory notes (P-Note). The underlying equity is owned by the Sebi registered institution who issues a Participatory Note to the Investor seeking exposure to the underlying asset, and the P-Note trades in line with the price of the cash equity.
The regulators thinking is to allow FIIs to trade the equity market directly without having to register with Sebi first. Last week, the market regulator discussed the issue of removing the distinction between foreign direct investment (FDI) and foreign institutional investment at a meeting of the high level co-ordination committee, which included Reserve Bank of India and finance ministry officials.
The suggestion was that since those who invest using the FDI method, are not required to go through the registration rigours that FII must face. Removing the distinction between FDI and FII investments will automatically imply that FIIs also need not go through the whole registration process.
Another option that could be considered is easing the criteria governing FIIs behaviour if removing the registration requirement is not feasible.
Last month, Sebi 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 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.
Easing up on disclosure and regulation requirements would substantially add to liquidity on Indian markets. If Foreign Institutions could come to this country and freely buy and sell Indian equity, for a start it would make things much more transparent, and liquidity would increase. Though during a bear market like the current one global markets are experiencing, that increased liquidity could disappear very quickly
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