Move to check FIIs breaching 10% mark

In order to restrict attempts by Foreign Institutional Investors to hold more than the stipulated 10 per cent stake in a firm through sub-accounts and check herding, an expert group has suggested that the FII holding should include all such sub-accounts which have common beneficial ownership as the FII.

The expert group on "Encouraging FII flows and checking vulnerability of capital markets to speculative flows", under Chief Economic Advisor Ashok Lahiri, has stated that the limit of such holdings by FIIs and sub-accounts should be brought down to 10 per cent over a five-year period starting December 2005, as expanding the scope to include sub-accounts could mean holdings of more than 10 per cent.

"This requirement may be phased in over a five-year period with a limit of 20 per cent by December 2005, 18 per cent by 2006, 16 per cent by 2007, 14 per cent by 2008, 12 per cent by 2009 and 10 per cent by 2010," the group said in its report. It points out that the suggestion has been made to check "herding".

"A single FII may have many customers, with sub-accounts. The FII may be a prominent advisor shaping the decisions of all these sub-accounts. This may lead to difficulties if there is 'herding' "" that is a situation where all these sub-accounts behave in a correlated way," the report said.

Vivek Mehra, executive director, PricewaterhouseCooper said the suggestion appeared to be aimed at ensuring that FIIs did not extend their holding in a company beyond 10 per cent directly or indirectly.

Without calling for an outright ban on sub-accounts, the report said that entities which do not have reputational risk or are unregulated could be barred from registration.

In order to ensure that only clean money is permitted in the securities market through recognised banking channels, the report also suggested a negative list of tax havens, where entities registered in such jurisdictions are prevented from attaining FII status.

It said that FII inflows can be assisted by PSU investment. Companies executing large projects in the infrastructure and telecom sectors should also be encouraged to access the domestic capital markets.