FIIs told not to deal with Indian entities

Sebi's advice was handed out to all FIIs in India in a low-profile meeting a fortnight ago.

According to sources familiar with developments, the FIIs have been asked to confirm in writing that they have complied with this requirement every fortnight when they submit their statement on the ownership of participatory notes issued by them.

The market regulator's intention is to ensure that no Indian entity is routing its money to the Indian markets in the garb of being an offshore registered entity.

In its recent analysis of the details of participatory notes (PNs) issued by FIIs, Sebi has found that a number of clients were overseas corporate bodies (OCBs), which by definition are controlled by Indians.

Earlier, OCBs had been barred from participating in the market in any way. Following the markets crisis of February-March 2001, Sebi suspected Indian corporates of ramping up their share prices through the OCB route.

Sebi, it is understood, is also planning to put into place more stringent information disclosure norms for FIIs. It might make it mandatory for FIIs to disclose client information rather than on a need-to-know basis.

According to the Sebi analysis, "the total purchases made by Mauritius-based FII/sub-accounts accounted for about 38 per cent of the total gross purchases and 25 per cent of total net investments of all FIIs."

Incidentally many of the Mauritius-based sub accounts have disclaimed all knowledge of the ultimate investors on behalf of whom the PNs were being issued.

Incidentally all these entities (the FIIs and sub-accounts) have given declarations that they have not issued these derivative instruments directly or indirectly to resident or non-resident Indians, persons of Indian origin and OCBs.

The location of many of the investors show that a significant proportion of them are from the Cayman Islands, a good bit from New York and the rest scattered around the United Kingdom, Singapore and Hong Kong.