At least three large European banks' dealings with Indian companies and individuals are being probed for alleged round-tripping of funds by using certain multi-layered transactions in violation of Sebi norms.
It is suspected that some portfolio managers at these banks, which have significant presence in Indian financial markets, could have helped their Indian clients to route their money back into India in disguise of foreign funds through use of investment vehicles across various jurisdictions.
The regulator fears that some promoters might also have been involved in such practices to boost share prices of their companies by showing a strong FII interest, a senior official said.
Sebi is coordinating with other regulators and agencies in India and abroad as part of investigations into this case, where some well-known companies and industrialists are also suspected to be involved, the official added.
Two of these three banks are from Switzerland and one is from the UK, sources said, while adding that they might not be involved directly and it could be the case that their employees were dealing with the clients directly without keeping the banks in the loop.
Still, the banks could face action on the negligence ground if allegations of wrongdoing come true, a senior official said, while
refusing to divulge the identity of the banks and their Indian clients.
Among others, Sebi is looking into the possible use of Protected Cell Companies from places like Mauritius, British Virgin Islands, Cayman Islands and Seychelles for alleged round-tripping of funds back into the capital market in the form of foreign institutional investors and overseas venture capital money.
In 2010, Sebi had barred PCCs to invest in Indian markets through FII route after it came across instances where certain Indians had used these entities to route their money back into markets as FII funds.
However, the regulator fears that funds structured as PCCs, which are legal entities in many jurisdictions, might be looking at a re-entry into Indian markets through routes like Foreign Venture Capital Funds and other avenues for the purpose of round-tripping of funds.
PCCs are specially designed entities that might comprise of various cells, having funds of various investors, in such a manner that there is legal segregation and protection of assets and liabilities for each cell.
Also, the insolvency of one cell does not affect the business of the entire PCC or that of the other cells.
Besides tax-related benefits for being considered as a single entity despite having various cells, foreign banks have also been found in the past of hard-selling these schemes to their wealthy clients for reasons like protection of identity.