A surging foreign institutional investors’ (FII) participation in Indian equity market for the first time seem to be showing a sign of slowdown, as several big foreign funds including ABN Amro Investment Fund, Allianz Global Singapore, Citicorp Tru­stee, Deutsche International Trust Corporation surrendered their registrations to meet new regulatory requirement.

The total number of FIIs registered with the Securities and Exchange Board of India (Sebi) dropped in past four months to 1,702 as on March 1, 2011 against 1,741 FIIs as on October 29, 2010. The number is lower even when compared with 1,713 FIIs registered as on March 31, 2010.

Lawyers handling FII accounts said the fall in numbers were due to the Sebi requirement notified last year that investment vehicles which are structured as protected cell companies or segregated portfolio companies and multi-class share vehicles cannot function as FII/sub accounts in the Indian market.

In the calendar year 2010, a record $29 billion FII money flowed into Indian equity market.

Now, several FIIs and sub-accounts have surrendered their licence during the past five months after Sebi barred foreign funds from operating as multi class share vehicles.

Sebi had put out a list of 197 FIIs and 342 sub accounts on September 30, which had till then not complied with the new directive.

As per latest data as a direct fallout of Sebi barring foreign funds from operating as multi-class share vehicles from October 1, 2010, out of a list of 179 non-compliant FIIs accounts, 70 FIIs have either surrendered or they applied for surrender or it expired.

Similarly, 235 sub accounts of 326 non-compliant sub accounts have been either surrendered or they applied for surrender or it expired. FII accounts and sub accounts number had surged sharply after Sebi had tightened participatory notes route of foreign investments in equity market in October 2007.

Raja Sujith, partner, Majmudar & Co International Lawyers said the “Sebi circular issued in April 2010 candidly communicated its stand point on permitted structures of FIIs/sub accounts. Investment vehicles which are structured as Protected Cell Companies or Segregated Portfolio Companies and Multi class Share Vehicles which do not meet the stringent conditions, are barred from operating as FII/sub accounts in the Indian market.”

He said the move ensured that no specific class of share is created to the benefit of a particular investor. Sebi has made this move to address its apprehensions on the FII route (through the above mentioned structures) being used for round tripping, Raja told Financial Chronicle.

Another corporate lawyer also admitted that there was significant slowdown in FII registration due to regulatory changes.

“Lot of FIIs were entering in Indian markets through tax havens. There is now lot of cohesive effort from the tax havens and RBI and Sebi to tighten norms. We have seen FIIs and sub-accounts exiting from regulatory perspective which has also resulted in some blips in the stock market,” he said.

Raja of Majmudar & Co said the stringent policy by Sebi was weeding out the FII space resulting in license surrenders. “The genuinely interested and serious investors have or are in the process of restructuring their investment vehicle in line with the Sebi instructions,” he said.

raviranjan

@mydigitalfc.com