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PNs for genuine clients, FIIs assure regulator

Janaki Krishnan, Rakesh P Sharma in Mumbai | September 15, 2003 11:12 IST

Foreign Institutional investors have told the Securities and Exchange Board of India that their overseas clients, to whom they issue participatory notes and offshore derivative instruments, are genuine customers and there is nothing speculative in their transactions.

In a meeting between Sebi officials and FII representatives on Saturday, the latter assured the markets regulator that in their clients' investments in Indian securities, there was no intention to manipulate the market or to destabilise it. Sebi will be submitting a report to the ministry of finance on this.

In August , Sebi had issued a circular asking FIIs and their sub-accounts to furnish details of all transactions where they were issuing offshore derivative instruments on a fortnightly basis.

Such instruments included participatory notes, equity-linked notes, capped return notes, participating return note, investment note which were issued by them against their underlying investments in India.

The underlying Indian investments can be equity, debt or derivatives.

The type of investor - such as hedge fund, individual, pension fund, corporate - also had to be specified.

The value of the Indian securities against which such instruments are issued had to be given in both the US dollars as well as in the Indian rupees.

The FIIs and their sub-accounts also had to give an undertaking that they, their associates and clients have not issued, subscribed, purchased any of the offshore derivative instruments directly or indirectly to or from Indian residents, non-resident Indians, persons of Indian origin and overseas corporate bodies.

While there is no way to verify the figures, market information held in July this year that investments by hedge funds had surged and it was estimated that nearly 40 per cent of all FII money flowing into the equities markets was from these funds, which take advantage of the arbitrage opportunities available in various markets.

This had induced Sebi to become more vigilant.

In the aftermath of the Ketan Parekh-related market crisis of March 2001, Sebi has issued a circular in October 2001 asking FIIs to disclose transactions where they issued participatory notes. But the information was not readily forthcoming.

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