Sebi bans Societe Generale from issuing PNs

The Securities and Exchange Board of India (Sebi) today issued a show cause notice and prohibited foreign institutional investor (FII) Societe Generale from issuing, subscribing or transacting in off-shore derivative instruments (ODIs), which are also known as participatory notes, or PNs.

This is the second FII after Barclays Bank, which has been banned by the market regulator from issuing PNs in the past one month.

Sebi said Societe Generale had prima facie violated its FII regulations by furnishing false and incorrect information.

It further said that Societe Generale was not able to ascertain whether the entity to which ODIs were issued were regulated.

“Societe Generale has failed in its due diligence expected in the observance of the know-your-client norms,” said Sebi in its order.

Between January 2006 and January 2008, it was observed that Societe Generale had issued certain ODIs to Hyte Securities Ltd, with Reliance Communication Ltd as the underlying. Sebi had directed Societe Generale to provide regulatory status of Hyte Securities, to furnish details about the ultimate beneficial owners of ODIs issued and to provide documents in support of the transaction with Hyte and any onward issuance of ODIs.

Sebi says Societe Generale misinformed on the above points in violation of regulatory norms.

In the Barclays Bank episode, too, Sebi had sought detailed proof of its dealings in PNs with UBS AG, which related to shares of Reliance Communications (RCom).

While initially Barclays had said it had issued PNs of RCom to UBS AG, when Sebi demanded proof, the bank changed its stance and said those PNs were actually issued to an entity named Hythe Securities Ltd, and not to UBS AG as disclosed by it since 2006.