FIIs may be barred from boards of SEs

MUMBAI: Foreign portfolio investors are set to be barred from being represented on the boards of stock exchanges (SEs) in the upcoming policy on foreign investment for this segment of the financial sector.

The government wants to permit foreign institutional investors (FIIs) to invest in shares of SEs once they are listed. The reason is that the entry of overseas investors could help boost liquidity in the shares of local bourses. The policy now being finalised envisages an foreign direct investment of 25% and 24% for overseas portfolio investors.

Although the government has travelled a fair distance on this policy, compared to the earlier stance of treating investment in SEs as strategic in nature, it wants to tread carefully. Therefore, policymakers want to build in a restrictive clause in the regulations which will keep out foreign portfolio investors from the boards of SEs. This is to prevent a conflict of interest arising out of trading and being on the management of exchanges.

In many countries, there are fetters on foreign investment in SEs, with investment ceilings ranging from 5-15% in Australia.

Along the way, an idea of imposing a cap on voting rights for overseas investors, on the lines of the legislation for investors in local private banks, has also been mooted. However, this may not be reflected in the policy, officials said.

The finance ministry has been in discussions with financial sector regulators, RBI and Sebi, on this issue, and a final view is expected to emerge soon, an official said. The central bank has its reservations on allowing foreign portfolio investment. That may not be the case elsewhere. In one of the biggest overseas exchanges, Deutsche Borse, institutional investors account for close to 97% of the investor base.

The provisions relating to investment by foreign portfolio investors are governed by Sebi’s regulations on foreign portfolio investors and the Foreign Exchange Management Act. The regulations could be amended to incorporate the restrictive clause, officials said. A foreign investment policy for SEs, clearing corporations and depositories is imperative, considering the divestment plans of the local SEs.

The Bombay Stock Exchange (BSE) is preparing the ground for a listing in the future, and is now being wooed by top bourses in the world such as New York Stock Exchange (NYSE), Nasdaq and Deutsche Borse. Once the foreign investment norms are unveiled by the government, a tie-up may not be far off.