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Government plans policy changes on FII investments via Mauritius

Subhomoy Bhattacharjee

The government has decided to plug the misuse of participatory notes by foreign institutional investors and take necessary corrective steps, including changes in the sub-account policy for Mauritius-based FIIs operating in the Indian bourses.

This is expected to be part of a large-scale review of the entire format of FII investment in the country, including the role of overseas corporate bodies in the stock markets.

The government is concerned that with the successive liberalisation in the foreign investment climate, it has become increasingly difficult to monitor the happenings in the markets.

The finance ministry has already held a meeting with the Reserve Bank of India and the Securities and Exchange Board of India brass to work out the contours of the revised FII policy.

Sources said with FIIs expected to increase their domination of the bourses, which will be accentuated after July 2 when badla expires, the government is keen to ensure that FII investment in the country does not become a sore point.

The government's concern also stems from the fact that the JPC inquiring into the stock market scam is also expected to come down sharply on this issue.

The Sebi interim report has pointed out that the FIIs with subsidiaries in Mauritius opened sub-accounts in India, which then issued participatory notes to entities, many of which may not be allowed to invest in India.

The sub-account then invests in the Indian markets ostensibly for the FII principal, but actually for the entity which has been issued participatory notes.

The government is also in favour of a comprehensive policy to guide investment norms for OCBs. This is expected to take the form of more stringent disclosure norms for OCBs before they can invest in the stock markets.

Currently to attract investment into the country, the government has kept the norms for OCBs fairly liberal, as most of these are set up by non resident Indians.

The new OCB policy will also have to address the problem of who is to administer it, as the present control mechanism is divided between the RBI and Sebi.

While the vexed Double Taxation Avoidance Agreement with Mauritius has been the major attraction for companies to set up base there, the government is also thinking of making changes in the registration of sub accounts of FIIs registered there, before allowing them to invest in the bourses.

Along with disclosure norms, the government is also considering if it can be made mandatory for the sub account to disclose for which entity it is undertaking the transactions.

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