Stock market watchdog Securities and Exchange Board of India (SEBI) has brought in regulations on the increasing foreign fund inflows in Indian stock markets.
On Thursday, it formalised a ban on sub-accounts of foreign institutional investors from issuing participatory notes. Foreign investors use accounts registered in tax havens like Mauritius or the Cayman Islands to trade in shares for their clients. These, known as sub-accounts, issue participatory notes, or P-notes, to the clients as proof of purchase, thus allowing them to remain anonymous. SEBI has given foreign funds 18 months to close such trades.
However, it does not put an end to P-notes altogether. Registered foreign funds can issue up to 40 per cent of their investment in India through the instrument. The size of their total investments would be based on their asset value as of September 30, 2007.
Also, foreign funds who trade on their own or corporate sub-accounts can shift from sub-account status to fully registered. The regulator has also paved the way for new set of foreign investors. Pension funds, foundations, endowments, university funds and charitable trusts are being considered for registration under a separate category. The regulator left unclear whether fund houses based in other countries would be subject to the regulations of their home countries or the country they use as a channel to invest here.