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OCB hunt puts Sebi in a quandary

Mumbai, Nov. 30: It’s a Catch 22 for Sebi as the market regulator deepens the probe aimed at finding out whether overseas corporate bodies (OCBs) that were banned by it after the scam of 2000 are sneaking in.

In the firing line are a bevy of bulge-bracket foreign funds. The fear is that cracking own on them could derail the FII-fuelled market boom, the best in recent years.

Take the case of a Mauritius-based OCB (Magnus Capital Corporation), which has participatory notes issued by Citigroup and Goldman Sachs against various underlying securities. Sebi’s response so far has been to inform RBI for “necessary action” at their end.

Similarly, Sebi has noticed that 31 entities, appearing to be OCBs, have subscribed to participatory notes issued by some of the FIIs/sub-accounts. Again, Sebi has lobbed the ball to RBI’s court.

Legal eagles reckon that investigations into alleged breaches of regulations by top-notch foreign institutions may reach a dead-end. “It is tough to find the person who is investing through the FIIs,” a lawyer said.

“After getting approval from their clients, these entities have started submitting information,” Sebi told the finance ministry. However, only four entities — Citigroup Global Markets (Mauritius), J. P. Morgan Chase, HSBC Financial Services and Goldman Sachs Investments — have furnished details needed for the probe.

Of them, Goldman Sachs had issued participatory notes/warrants to CSFB, Switzerland, which is outstanding to the extent of Rs 579 crore as of September 2003. Similarly, Citigroup had also issued participatory notes to CSFB against certain Indian securities. The details of these transactions are still awaited.

“The information given by them was only up to the next level and the FIIs said investors beyond this level are not known to them,” Sebi told the ministry.

Next level of information is being called for from the other FIIs/sub accounts, Sebi said. “All these entities have given declarations stating that generally they have not issued these derivative instruments directly or indirectly to Indian residents/Non-resident Indians/persons of Indian origin, the market regulator added.

Legal analysts said the market regulator is in a piquant situation. It is caught between its duty to develop the markets and its recent findings, which may upset equilibrium. After all, foreign investors have made the current bull rally a reality, pouring in Rs 24,433 crore.

“If any entity does not provide information within the specified timeframe, it would be subject to regulatory process,” Sebi chairman G. . Bajpai said.

When the markets are on a roll, Sebi would not like to be dubbed as a party-pooper. Some, however, say action against the errant FIIs will only have a short-term effect as India remains a good investment destination for international investors. Unless FIIs reveal more about their clientele and their sources of money, it is difficult for Sebi to establish anything from the investigations conducted so far, legal analysts said.

Sebi has just managed to scratch the surface. According to legal analysts, to dig deeper, Sebi has to make use of its powers, giving exemplary punishment using Section 11.

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