FIIs may have to maintain reserves

MUMBAI: Foreign institutional investors (FIIs) may soon be asked to maintain reserves with RBI. In a bid to arrest excess liquidity arising out of volatile FII inflows, the committee on fuller capital account convertibility (CFAC) has recommended that under exceptional circumstances, FIIs could be asked to maintain unremunerated reserves with RBI as a temporary measure.

The committee has further recommended a time-bound phasing out of participatory notes (PNs), considering that the identity of owners is not verifiable. PNs are derivative instruments issued by foreign security houses to entities and individuals who want to take exposure to Indian stocks. The regulators feel the route has been misused by NRIs and fronts of Indian companies.

The panel has suggested that while FIIs must be barred from investing in these notes, existing holders could be provided an exit route for a complete phase-out within a year’s time.

The committee has further urged that overseas corporates should be given the opportunity to invest in stock markets back home. These investments could be channelised via entities, such as mutual funds and portfolio management schemes, registered with Sebi, said the committee hinting the latter will be individually responsible for fulfilling know-your-customer and other norms.

The funds, however, must enter the country through bank accounts, the panel has mandated.A senior market analyst said, “The imposition of reserve requirements on FIIs is indicative of the lack of confidence in foreign investors. It also hints at an overlapping of regulatory interests between RBI and Sebi. This is one measure that has absolutely no precedence, anywhere in the world.”

Regarding banning PNs, market sources said the existing volatility arising out of hedged funds and local entities bringing back “hawala funds” is something that can be handled very well.

Among other measures, the committee has recommended an overall ceiling for external commercial borrowings (ECBs) and for automatic approval should be raised gradually. Also, the panel has mandated that rupee-denominated ECBs (which are payable in foreign currency) should be put outside the ECB purview.

Recommending that import-linked short-term loans must be monitored comprehensively, the committee has called for review of the per transaction limit of US$ 20 m and revamping of the scheme to avoid unlimited borrowing.

Looking at the M&A scenario, the committee has stressed the need for liberalising the present limits for corporate investment abroad. It has suggested the limits for such outflows should be raised in phases to 400 % of net worth from the present 200%.

The committee has recommended that exchange earners foreign currency (EEFC) account holders must be given access to foreign currency current and savings accounts.