Sebi ban cleans up FII space

The capital market regulator’s ban on certain foreign institutional investor (FII) structures is helping weed out non-genuine overseas investors. In the recent past, many FIIs have surrendered registration, while a number of sub-accounts have converted themselves into registered institutional investors.

According to the Securities and Exchange Board of India (Sebi), 24 FIIs and 130 sub-accounts have applied for surrendering registration after the new norms. In all, 188 non-compliant FIIs and 336 sub-accounts are barred from taking fresh positions in the Indian market. They, however, can retain positions or sell off/unwind.

According to experts, the list of entities opting for surrender will swell in the coming days, as overseas investors serious about investing in India will restructure and seek direct registration. They say that some entities will use the participatory note (PN) route to invest rather than restructure.

“It’s a combination of three factors. Some entities that have surrendered their memberships would be those that were never active in India. In other words, India did not feature as a large allocation country,” said Siddharth Shah, principal and head (fund formation), Nishith Desai Associates.

“Many others converted their sub-accounts into registered FIIs, thereby surrendering their original sub-accounts, whereas some entities surrendering their registration would opt for the PN route. The Sebi move has led to a clean-up, encouraging dormant players to surrender,” he added.

In April 2010, Sebi asked FIIs to stop using the complex structures of protected cell companies and segregated portfolio companies. In addition, it said the investor base be broadbased in case of multi-class share vehicles (MCVs). The deadline was September 30.

Protected cell companies are entities with several cells within the same vehicle. A cell has its own assets, liabilities, capital, dividends and accounts. Each cell functions as an independent unit within the overall set-up and the debtors and creditors of each cell have no claims against the assets or liabilities of another cell.

An MCV is a structured entity where investors in each class have different contractual agreements with sub-accounts with regards to investment strategies, liabilities and fund manager.

Incidentally, after Sebi’s restrictions on PNs in 2008, MCVs had become popular with hedge funds and a large number of individual investors. The notional value of investments in equities through PNs was as high as 35 per cent in January 2008. This fell to below 15 per cent in December 2008. At present, the number is below 14 per cent.