Foreign HNIs may not be allowed to use FII sub-a/c for India entry

MUMBAI: HIGH networth individuals (HNIs) from abroad investing in Indian stock markets may have to face the prospect of being stopped in their tracks.

The committee on FII investments, constituted by the finance ministry under the chairmanship of chief economic advisor Ashok Lahiri, has favoured barring HNIs from investing in Indian stock markets through the foreign institutional investors (FIIs) sub-account route.

The Lahiri committee���s suggestion to the government is meant to address concerns of market integrity. The fact that the reputation of such HNIs may be at risk and they are unregulated in their country of origin has also influenced the committee.

The Reserve Bank of India (RBI) has often expressed its discomfort at capital flows coming through the sub-account route. The RBI had not only sought a ban on participatory notes (PNs), but also sub-accounts, considering the difficulty in tracking the identity of the original investor. However, the Lahiri committee has not supported the ban, saying such a move could be unsettling, as 90% of portfolio inflows to India are through the sub-account route.

Capital flows from overseas HNIs also go against the policy of encouraging broad-based funds to invest in India, as they fall outside this category. The committee has said there is merit in prohibiting HNIs from registering themselves as FII sub-accounts in India.

HNIs and foreign firms were allowed to invest in Indian stocks in ���00 through sub-accounts after Sebi amended its regulations.

However, lately, there has been an apprehension, especially on the part of the banking regulator, that this route could be exploited by unethical individuals. There is a fear that individuals who may have taken unaccounted money out of the country could bring it back through the FII sub-account route.

This could possibly be used to ramp up the price of certain shares, particularly those where HNIs already have large holdings.

The Lahiri committee has suggested a possible alternative to address such market concerns. Entities of questionable reputation, or those that are unregulated, may be prohibited from registering themselves as FII sub-accounts and they may be given sufficient time to wind up their positions, the committee���s report says.