The Hindu : Business : Sub-accounts free to invest in ODIs

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Friday, Oct 26, 2007
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Business

Sub-accounts free to invest in ODIs

Oommen A. Ninan

KYC norm for overseas investors

Fund manager should have track record
New exchange for SMEs proposed

MUMBAI: Giving a strong signal to the capital market that the back door entry of entities will not be allowed, the Securities and Exchange Board of India (SEBI) on Thursday decided that it will only accept issuance of Overseas Derivative Instruments (ODIs) like Participatory Notes (PNs) only to ‘regulated’ entities and not ‘registered’ entities.

PN is an instrument issued by the foreign institutional investors (FIIs) to their foreign clients (whose identity was not known in India). The Indian stock markets recently witnessed steep rise in its benchmark indices, with a huge fund flow from abroad, through FIIs.

The SEBI board, which met here on Thursday, discussed the various issues relating to registration of FIIs, namely, issuance of PNs or ODIs by some FIIs and sub-accounts and the linkages between the quantum of PNs and ODIs issued verses the capital flows into the Indian markets.

“The SEBI felt that in the long-term, it would consider introduction of a regime of Know-Your-Customer (KYC) or Anti-Money Laundering (AML) certification on foreign entities seeking to invest in the Indian markets, as is now applicable on domestic entities, compliance with which will enable such entity to invest directly,” said M. Damodaran, Chairman, SEBI, here, while addressing a press conference immediately after the board meeting.

The board felt that in the long-term, “the approach should be to enable access to Indian markets by quality investors, by introducing a range of innovative products, including Over-the-Counter (OTC derivatives), as are available in other markets, at competitive cost.” The board decided that FIIs could not issue P-Notes that were based on derivatives. However, it was clarified that FIIs and sub-accounts were free to invest in derivatives traded on recognised stock exchanges, directly.

The SEBI chief said its board had decided to allow setting up of an exchange for the listing of small and medium enterprises (SMEs). Indian SMEs need not go abroad to raise funds. However, he felt that there was no need for more than one exchange for this purpose.

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