FIIs continue overseas lending despite warnings

Foreign institutional investors (FIIs) continue to lend stocks to overseas investors despite a warning issued by the Securities and Exchange Board of India (Sebi) and Finance Minister P Chidambaram against such transactions.

According to data released by Sebi late Friday evening, when the Bombay Stock Exchange’s benchmark index, the Sensex, fell over 1,000 points, FIIs lent over 300,000 shares of Reliance Petroleum and over 69,000 shares of Educomp Solutions. On that day, Reliance Petroleum fell 14.09 per cent to close at Rs 77.10 and Educomp Solutions dipped 6.67 per cent to close at Rs 1,778.

FIIs lend stocks to overseas investors, who invest through participatory notes (P-notes), which investors and hedge funds not registered with Sebi use to trade in Indian securities.

Sebi has said FIIs have been lending stocks to P-note holders to facilitate short sales, a factor that may have contributed to the collapsing market. Between October 10 and 17, Sebi said stocks worth over Rs 1,000 crore were short-sold, pulling down the benchmark share indices over 12 per cent in seven trading sessions.

Short sales refer to the sale of shares investors do not own. They are usually “borrowed” from other entities and bought back later. Investors selling short believe the stock price will fall. Market players expect short selling through overseas borrowed stocks to be nearly $5 billion.

On October 18, Sebi Chairman CB Bhave issued a statement warning FIIs to curb their overseas lending activities but stopped short of asking them to unwind their positions.

On October 23, Finance Minister P Chidambaram said FIIs should wind up their short positions through borrowed stocks within a few days, but did not provide specifics.

The Sensex and the broader 50-share National Stock Exchange NSE Nifty lost over 12 per cent since Chidambaram’s statement.

Meanwhile, the regulator is yet to disclose data submitted by FIIs about stocks lent by them in 2008. Sebi had written to all the P-note-issuing FIIs on October 17 seeking such data, the deadline for which expired on October 23.

Sebi officials could not be contacted since they are in Goa for a meeting on setting up the National Institute of Securities Management (NISM).