Govt may cut off FII sub-a/c route for foreign investors

NEW DELHI: Cash rich foreigners are not welcome to get registered as sub-accounts of foreign institutional investors (FII). Instead, they will have to use the foreign direct investment (FDI) route if they want to participate in the Indian growth story. But other sub-accounts will face no such problems.

The government hopes that this would clear the air on the vexed issue of Participatory Notes (PN). PNs are issued by sub-accounts of an FII as instruments that can trade in stocks.

The government advise to the Securities and Exchange Board of India says high net worth individuals should not be registered as sub-accounts of FIIs. The position is based on the recommendation of the expert committee under Ashok Lahiri, chief economic adviser to the finance ministry. The committee had suggested that only broad-based organisations should be permitted to register as FIIs with the Sebi. This has ruled out high net worth individuals from getting into the stock market as FIIs.

The finance ministry instruction goes further, to bar such individual entities from even registering as sub-accounts of FIIs. Sources said no HNI from abroad has therefore been granted registration, as a sub-account of an FII. Having ruled out dubious sub-accounts, the government is therefore confident that the presence of genuine PNs from bonafide sub-accounts would benefit trading in the Indian stock markets.

The finance ministry and Sebi have often held that there is no cause for alarm in the continued presence of PNs in the stock markets. The position has, however, been countered by RBI, which has said that no new PNs should be allowed into the capital markets and the existing PNs be wound down within a year.

The current dispensation ensures that rich individuals from abroad, can only tap the FDI route. According to R Sridhar, capital market expert at PricewaterhouseCoopers, since FDI approval would usually come through the FIPB
window, this means far more control on their entry and exit from a stock, unlike the FII road.Incidentally in September, Sebi has expanded the list of entities that are eligible to be listed as FII. For this it has used the “broad based” criteria suggested by the Lahiri committee.

Thus overseas registered or incorporated pension funds, mutual funds, investment trusts, insurance companies, reinsurance companies, international or multilateral agencies, foreign governmental agency or a foreign central bank can now get recognised as FIIs.