Easier PN norms, more independence for Sebi

In an effort to encourage entry of foreign institutional investors (FIIs) in India, the Reserve Bank of India (RBI) Committee on Financial Sector Assessment (CFSA) today said that since FIIs maintain identity records of the entity they issue participatory notes (PNs) to and capital market regulator Securities and Exchange Board of India (Sebi) can obtain this information from them, there should not be any cause for concern from the ‘Know Your Customer (KYC)’ angle raised by regulators in the recent past.

Raising concerns over the origin and source of investment flowing into the country, CFSA felt that there was a need to take suitable measures which would enhance the confidence of foreign investors and regulators alike in the Indian financial system.

CFSA pointed out that PNs can be issued or transferred only to persons who are regulated by an appropriate foreign regulatory authority. The central bank’s concern is that as PNs are tradable instruments overseas, this could lead to multi-layering, which will make it difficult to identify the ultimate holders of PNs. Also, the transactions of FIIs with PNs are outside the real-time surveillance mechanism of Sebi.

Furthermore, the committee called the need for a greater independence of regulatory and supervisory authorities in India. The report said that the central government should not supersede the functions of regulators like Sebi unless absolutely required. Since bodies like Sebi are empowered to frame regulations without the approval of the government, an external political and commercial interference should be avoided.

While a Section of the Sebi Act gives it the right to remove a member after providing him an opportunity of being heard, Section 5(2) of the Act gives the central government the right to terminate the services of the Chairman or a member at any time by giving a notice of three months. Finding a conflict of interest under these two Acts, CFSA suggested to remove the Section 5(2) Act, while giving Sebi independence to remove a member under its own powers and without any intervention of the central government.

CFSA found a significant overlap between Sebi and the government with the latter having the powers to issue directions to Sebi even in areas other than the policy.