270 FIIs await Sebi nod

Over 270 applications from foreign institutional investors (FIIs) are awaiting the Securities and Exchange Board of India's (Sebi) clearance as the debate on the speedy clearance of registrations by the capital market regulator rages on.

In fact, during the last one year, the Sebi has cleared a total of 141 applications, an average of about 12 registrations a month.

12 CLEARANCES A MONTH Number of registered FIIs as on Oct 18: 1,113 vs 972 FIIs in same period - an average of 12 clearances a month Number of sub-accounts with FIIs: 3,445 vs nil during last year Applications pending for FII registrations with Sebi: 270-plus Some of the hedge funds that received clearance recently: Italy-based Alett i Gestielle Societa, Toronto-based DGAM Emerging Markets Equity Fund, Karma Capital Management and Blackrock advisors

Significantly, the number of sub-accounts skyrocketed from zero to 3,445 during the last one month, according to the Sebi data. The number assumes significance in the wake of the Sebi proposal to clamp down on foreign inflows through the participatory note (PN) route.

Sebi sources said it was streamlining the registration process for both FIIs and their sub-accounts in a move to encourage direct inflows from foreign investors into the country's equity markets.

In a discussion paper issued late on Tuesday, the Sebi proposed policy changes on the offshore derivative instruments (ODIs), popularly known as PNs, and asked feedback from market participants.

The Sebi board, which is meeting next Thursday, is expected to announce the new regulations. Sebi sources said institutions or hedge funds investing through sub-accounts would now have to register themselves as FIIs. The regulator would freely permit them to invest in Indian stocks directly, provided they furnished all details and fulfilled all the regulatory criteria.

"We will see sub-accounts getting phased out eventually," said a top official of a brokerage house. There are close to 1,000 FIIs registered with the Sebi, of whom about 300-350 are reasonably active. Market participants point out that most of the funds coming through P-notes are from hedge funds (30 per cent), which want to trade in the Indian equities without registering with the Sebi.

"A PN structure is a tax on any of these foreign institutional investors (hedge funds or others who invest through P-notes) as they pay a transaction cost of 0.4-0.5 per cent to these FIIs, who are registered with the Sebi. Since the registration process is tedious and they may not fulfil the Sebi criteria, they pay this fee. Most of the institutions coming through the PN route are legitimate investors. But they may not fulfil the Sebi criteria or they don't want to go through all the hassles," said Alok Sama, founder and president, Baer Capital Partners, a hedge fund.

Although it is undisputable that hedge funds have a very legitimate role in the market, Sebi sources said they expected hedge funds to bring in more transparency.