Fii Deals On High-Level Panel Agenda

The next edition of the high level capital markets (HLCM) committee meet is expected to see the Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI), thrashing out the role of foreign institutional investors (FIIs) in the derivatives market.

Another item which will top the agenda is the issue of bank funds finding their way into stock markets through various channels.

Recently, the Sebi had suggested setting up of a centralised monitoring mechanism which would track banks funding brokers. There is a feeling that both the regulators should work together in both these issues.

With derivatives introduced on the domestic bourses, Sebi is anxious about the quality of the participants in this segment.

Sebi at the moment has tentatively proposed that FIIs must necessarily sell only covered calls (a call option position which is covered by an opposite position in the underlying share) as opposed to a naked call (where there is no opposite position in the underlying).

This is parallel to FIIs not being able to short-sell in the normal cash market and only make delivery-based trades. Foreign investors have not taken kindly to this stricture.

FIIs are also barred from shorting index futures as it is feared that they might arbitrage between different markets and manipulate the index.

According to a senior official of BSE, "At present there are only two participants worth the name in index futures and both of them are preferring to trade on the NSE's Nifty futures. One of the participants is a financial institution, while the other a large broker."

It is felt that FIIs with their superior experience in derivatives trading could bring more depth into the market.

Sources said that Sebi was worried by the way FIIs have been manipulating the market in collusion with domestic brokers.

Credit Suisse First Boston and J M Morgan Stanley were two FIIs held responsible for such manipulation following Sebi's interim investigation into the market crisis in March.

This was a first of its kind move for the regulator as the official stance of Sebi was that FIIs could do no wrong and were upholders of clean practices.

Sebi is continuing its investigations and, according to sources, more information on irregularities perpetrated by them are emerging. Having tasted blood with CSFB, Sebi is prepared to weld the stick in the future.

The meeting is also scheduled to discuss foreign investment and whether foreign direct investment and portfolio investments should be clubbed under a single ceiling.

The last meeting of HLCM scheduled for Monday had to be cancelled due to the non-availability of the Union finance secretary.

The HLCM has the finance ministry and the Insurance Regulatory and Development Authority as its constituents, while the Reserve Bank of India governor, Bimal Jalan, is the chairman of the committee.