Sub-accounts rising despite amendments to FII norms
FII registration process taking a long time.
--------------------------------------------------------------------------------
Sub account registrations with SEBI rose by 156 to 4,626 in SeptemberFII
registration with SEBI takes a very long time whereas sub account registration
is much faster
--------------------------------------------------------------------------------
Kripa Raman
Mumbai, Oct. 4
Despite SEBI trying to encourage foreign funds to come upfront and register as
FIIs, the number of sub-accounts has been rising, even after the amendments to
the FII regulations were notified this May.
SEBI's changes were in essence meant to discourage sub accounts, tighten issue
of offshore derivative instruments and relax conditions for FII registration so
that investors would "come directly through the front door as FIIs" as SEBI
officials would often put it.
But even in September, a dark month indeed for financial entities worldwide,
sub account registrations with SEBI rose by 156 to 4,626.
"Sub accounts are persons outside India on whose behalf investments are
proposed to be made in India by an FII, and who is registered as a
sub-account," according to the SEBI definition.
The reason for the rise in sub accounts is that FII registration with SEBI
takes a very long time whereas sub-account registration is much faster, said Mr
Anoop Narayanan, Partner at Majmudar & Co, international lawyers. India is
still a better place for investment than many other countries at this juncture,
and investors are finding ways to participate in the market, he said.
Although SEBI intended to relax conditions for FII registration, its amendments
were more explicit and clear that the entities must be regulated and
registered, and that has made matters tough. "We are finding that FIIs through
the Mauritius route are being scrutinised in more detail by SEBI as opposed to
other jurisdictions; and historically the Mauritius route has been used for
investment in India," said an official with a law firm that advises FIIs.
There is greater scrutiny that the fund managers at FIIs are subjected to,
including whether they have a hedge fund background, something frowned upon by
SEBI, he said.
Under the May amendments, FIIs are responsible for all acts of omission and
commission of all its sub accounts. They have to ensure KYC norms of sub
accounts. The responsibility extended to not just registering sub accounts but
also de facto, to say that sub accounts are observing the regulations. "At that
time many FIIs had started to ask their sub accounts to wrap up and had decided
to do only proprietary trading," said an official with a law firm. That NRIs
could not register as sub accounts made sub account existence even more
difficult, he said. Sub accounts could not issue offshore derivative
instruments either.
But despite all this, sub accounts have only increased in number, because it is
still the quickest way to participate in the market. "Registering a sub account
is more like a client registration process, the FII registration process is
tougher," said Mr J.M. Thakur, Chartered Accountant, who appears in SEBI
related cases.
One other reason for the increase in sub accounts could be that while NRIs are
not eligible to apply as sub accounts, there could be Overseas Corporate Bodies
investing. Whether OCBs can invest or not as sub accounts has been subtly
dropped in the amendments (the earlier proviso, that NRIs and OCBs registered
with RBI cannot apply as sub accounts had been done away with), said legal
experts.
http://www.thehindubusinessline.com/2008/10/05/stories/2008100551250101.htm
Life is a bridge. Cross over it, but build no house on it.
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