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Clarification on Regulation of FIIs and PNs
by Jo BlackThe attention of the Indian federal government has been drawn to a news item appearing in a section of press on the allegations made by Ms. Jayalalithaa, General Secretary, AIADMK regarding FII regime, movement of stock market indices, Participatory Notes etc.
The allegations made by Ms. Jayalalithaa, General Secretary of the AIADMK, are totally baseless besides betraying a complete lack of understanding of the FII regime that is in force.
FIIs are regulated entities, SEBI being the regulator.
In terms of the SEBI (FII) Regulations, 1995, an FII may issue Participatory Notes (PNs) with Indian instruments as the underlying securities, subject to the subscriber being a regulated entity.
Further downstream issue of PNs, if any, may also be done only to regulated entities.
Besides, FIIs are required to report at the end of every month, in a prescribed format, all information relating to PNs issued by them including the names of subscribers to the said PNs.
FIIs are also required to give an undertaking that the FII or its associates have not issued, subscribed or purchased any PNs to/from Indian residents or NRIs or PIOs or OCBs during the reporting period.
It is also pointed out that PNs are market instruments that are created and traded overseas.
Hence, the Government of India cannot ban or control the issue of PNs; they can only be regulated, and they are indeed being regulated by SEBI.
When a PN is traded on an overseas exchange, the regulator in that jurisdiction would be the authority to regulate that trade.
It may be recalled that, in October, 2007, SEBI took certain measures to further regulate the issue of PNs.
Ms. Jayalalithaa’s allegation that investments through PNs are believed to be largely responsible for the sudden and unexplained fluctuations in the stock market indices betrays a total lack of understanding of both PNs and the movements in the stock market.
The movement in stock market indices is a function of the investor’s perception of the economy or of a sector or of index stocks.
The movement is also influenced by domestic and international events, market sentiments, level of floating stock available, corporate performance and prospects of future economic growth.
On the issue of terrorist funds finding their way into the stock markets, the matter has been clarified in Parliament.
Information available with the Government and the regulators does not indicate any surreptitious entry of terrorist outfits into the stock market.
Besides, there are adequate provisions in the laws such as FEMA and PMLA to deal with unauthorised or suspicious transactions involving currency or foreign exchange.
This clarification issues with the approval of the Finance Minister who wishes to add that the statement of the General Secretary of the AIADMK appears to have been made not after gathering information or a careful study of the subject but purely out of a malicious design to spread misinformation.
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