RBI to help Sebi on due diligence on FIIs

Sebi would seek RBI's views on the credentials of FIIs applying for registration.

The Securities and Exchange Board of India (Sebi) is planning to seek the Reserve Bank of India's help to tighten the due diligence process for the registration of foreign institutional investors.

Sources close to the developments said Sebi would seek RBI's views on the credentials of FIIs applying for registration. The RBI, in turn, will seek the co-operation of regulators of countries where FIIs, applying for registration, are based.

Depending on the RBI's views and information gathered from host country regulators, Sebi will process the application forms.

At present, FII registration comes under the general permission rule of foreign investment norms. There will not be any change in the norms and the entire registration process will continue to be handled by Sebi which, occasionally, seeks the RBI's cooperation whenever there is any doubt in the behaviour of an FII in equity or debt market operations.

Henceforth, the joint operation will continue to check out the credibility of FIIs that want to operate in the Indian equity market and the quality of funds flowing into the market. This is because, as an entity, the FIIs also cover the hedge funds that operate in India. Hedge funds are not registered separately with the Sebi and therefore, operate through FIIs.

The disclosure norms are being tightened following the anti-money laundering drive in the Indian financial market.

"It is increasingly getting difficult for the market regulators to seek disclosures from these portfolio investors about the kind of instrument they use in the market, particularly the participatory notes," said a source.

Earlier, both Sebi and the RBI had expressed concerns to the ministry of finance on the bull run in the bourses. The objective is to monitor the quality of funds flowing into the Indian equity market.

Both the regulators have sought from the government regulatory powers under the legal framework to ask for disclosures on the identity of those investing through participatory notes.