Move follows clean chit to Goldman in the Black Monday case.
The Securities and Exchange Board of India (Sebi) has decided to review its know your client (KYC) norms for foreign institutional investors (FIIs) after Goldman Sachs got a clean chit last week in the May 17, 2004 stock market crash case. The other accused in the case, UBS Securities, was let off earlier.
On May 17, 2004 — widely known as Black Monday — there was a steep fall of 824 points in the Bombay Stock Exchange (BSE) benchmark index, Sensex, due to which trading had to be suspended twice during the day as markets hit the lower circuit. Under the then chairman M Damodaran, Sebi initiated investigations against UBS Securities and Goldman Sachs for suspicious selling in a few stocks on behalf of participatory note (PN) clients. However, last week’s clean chit to Goldman Sachs has put the spotlight back on the flaws in Sebi’s FII regulations, which were pointed out by the Securities and Appellate Tribunal (SAT) some time ago.
“There has been a longstanding debate on the loopholes, which allowed both UBS Securities and Goldman to go scot free in the Black Monday investigations. Although current chairman C B Bhave has already said that there would be a complete review of the FII regulations, we hope to plug these loopholes on a priority basis,” said a Sebi official on condition of anonymity.
According to regulations 15A and 20 of Sebi’s FII law, foreign funds have to reveal all information regarding their PN clients to the market regulator. However, when Sebi investigations into the Black Monday had reached a crucial stage and the regulator was close to know the ultimate beneficiary of the suspicious sales, the FIIs refused to part with some key information. Following this, Sebi imposed a one-year trading ban on UBS Securities for suppressing facts and not co-operating in the investigations.
According to Sebi, information on the ultimate beneficiary of PN deals was necessary and it was for every foreign fund house to obtain the same under the KYC norms. This is because certain clients’ trade may have an impact on the market condition, which is what seems to have happened in the Black Monday case.
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While refusing to reveal the name of the ultimate beneficiary, UBS had then said that it was under no compulsion to do so as the law in this regard was “vague” and did not specifically mention that the names of the ‘ultimate beneficiaries’ have to be revealed.
UBS approached SAT and the tribunal observed, “If the law has desired that ultimate beneficiaries of PNs should be ascertained by the FII, then the FII regulation should have specifically mentioned the same and the same should have been prescribed as a compliance report. It is quite evident that there is some vagueness about the KYC requirement under Regulation 15A of the FII Regulations, which persists even today…”.
Now, Sebi is in a Catch 22 situation as Goldman Sachs too has got away by using the same alibi.
The vagueness in the regulations still persists and Sebi is yet to make any amendments to the law governing KYC norms for FIIs.
According to a leading corporate lawyer handling FII cases, it would be difficult for FIIs to know the ultimate beneficiary. However, things will become clearer once the market regulator comes up with the amended law.