|Somaiya & Bajpai: Striking a ‘note’ of caution
Mumbai, Jan. 11: The Securities and Exchange Board of India (Sebi) is still wrestling with the participatory-note riddle that has intrigued regulators and stirred fears that it could be a conduit for dubious cash.
These are instruments that allow foreign investors not registered with Sebi, but with a yen for Indian shares, to buy and make money from what they cannot do officially.
Much of this business is routed through brokerage houses, which buy these shares on behalf of overseas individuals or entities that cannot, or do not, pop up themselves. The broker, for all practical purposes, acts like an exchange, seals deals using their internal accounts and sends out the capital gains back to note-holders.
So, why are market cops smelling a rat' One of the reasons lie in the veil of secrecy that keeps investors anonymous. More important, there is an overwhelming evidence to suggest that too many of these harmless notes are sloshing around bourses — too many masked operators strutting around under the garb of “foreign investors”.
In October and November, the total FII inflow was Rs 10,097 crore, of which Rs 5,756 crore came through participatory notes. These notes accounted for Rs 24,881 crore on November 30, out of the net foreign institutional investment of Rs 93,678 crore. They have, therefore, made up a little more than a quarter of the total foreign funds that gushed into Indian stock markets.
What has stoked concerns is that most of the investment in 2003 through participatory notes started from May. Before April, such funds were to the tune of Rs 2000 crore.
Sebi does not have any break-up of figures from April. The market regulator started computing the figures separately only from September onwards. Sebi chairman G. . Bajpai said the practice of asking FIIs the details of participatory notes was started only recently. “Earlier, we never had the break-up of FII money,” he said.
The bulge bracket inflows from FIIs — credited for the amazing bull run which is currently in progress — have pushed the sensex to touch a lifetime high of 6119.59 points on Friday, a gain of 82.19 per cent from its 52-week low of 2904.44.
“There’s a need to study the pattern of foreign investment on the bourses,” said Kirit Somaiya, Bharatiya Janata Party MP who heads Investors’ Grievance Forum, an association representing small investors in Mumbai.
Sebi has to adopt the same principle that it applies for local investors, Somaiya said. The market regulator has put in place a system for the local market participants where even sub-brokers keep details of their clients under a ‘know your client’ system.
Somaiya and others fear that participatory notes could be used by some dubious promoters to rig share prices of their own stocks. “Sebi should direct all FIIs to identify the ultimate investor, a rule which applies to local market participants,” Somaiya said.
Some people believe that participatory notes are preferred for their ease. Many of the FIIs were in a tremendous rush to invest on the Indian bourses. Since registration with Sebi would take time, many preferred to invest through participatory notes. Sebi has, however, quickened the process of registration.
Sebi has itself confirmed that 12 FIIs have issued participatory notes as on November 30. Reports indicate that the underlying investments represented by participatory notes spread over 200 scrips.
Mutual funds awash
Mutual funds have recorded net inflows of Rs 46,315.87 crore in April-December. The amount mobilised was Rs 4,22,371.20 crore, while their repurchase and redemption was pegged at Rs 3,76,055.33 crore, Sebi said.
The assets under the management on December 31 was Rs 1,40,094.55 crore. Of these, debt schemes soaked up Rs 1,09,878.76 crore and equity (growth) schemes Rs 24,831.17 crore.
Equity schemes were a big draw, mopping up Rs 3,773.01 crore. Private sector mutual funds raised Rs 3,88,225.05 crore; their redemptions and repurchases were Rs 3,44,517.01 crore and the assets managed was Rs 1,09,119.09 crore.