The New York Times DealProfessor has a column Burying Bear Stearns that highlights the takeaways from the Bear Stearns saga, which incidentally are matters we often endeavour to stress on this blog. They are:
- Moral hazard
- Systemic risk
- Corporate governance
SWFs as FIIs; Other Amendments to FII Regulations
SEBI has announced a fairly detailed set of amendments to the SEBI (Foreign Institutional Investors) Regulations, 1995.
One of the key amendments relates to the recognition of sovereign wealth funds (SWFs) as a category of investors eligible to invest into the Indian markets as FIIs. This marks a significant move because it makes clear the Indian regulators’ policy approach towards SWFs in the Indian markets. It is also remarkable in a sense because several other countries are yet undecided as to their precise policy of regulating SWFs. The registration of SWFs with SEBI as FIIs would introduce transparency as they would be required to submit the requisite information to SEBI regarding their organisation and operations both at the time of registration and thereafter on a continuing basis. This would help overcome one of the key criticisms of SWFs that they are relatively opaque to the outside world. Further, limitations on FII investments in Indian companies such as the fact that they cannot invest more than 10% in a single company would operate as checks and balances against assertion of excessive influence by SWFs in the Indian marketplace.
However, the current policy pronouncement also leaves some matters open for interpretation. For instance, there seems to be nothing that requires SWFs to invest only through the FII route as a mandatory matter. This is only an option available to SWFs and they may possibly continue to invest under the foreign direct investment (FDI) route otherwise available to foreign investors, in which case they may not be subject to the 10% cap on investment in single companies and other transparency requirements. This dual regime available to SWF (i.e. both the FII route as well as the FDI route) may still leave room for ambiguity and interpretation, and hence a clarification on these matters would be most desirable.
Apart from enabling SWFs to invest as FIIs, the new amendments bring about some further changes to the FII Regulations, which are as follows (quoted from the SEBI circular):
* The policy measures on Offshore Derivative Instruments (Participatory Notes) and changes to the registration criteria specified in SEBI Press Release dated October 25, 2007 have been incorporated in the regulations.
* In order to streamline the process of registration, the Application Forms for grant of registration as a FII and Sub Account have been modified.
* An asset management company, investment manager or advisor or an institutional portfolio manager set up and/ or owned by non resident Indians (NRIs) shall be eligible to be registered as FII subject to the condition that they shall not invest their proprietary funds. This has been enabled by suitable modification to Explanation II under Regulation 13 of the said regulations.
* The type of securities in which FIIs are permitted to invest has been widened to include schemes floated by a Collective Investment Scheme.
Some press reports are available here: The Economic Times, IndianExpress.com.
One of the key amendments relates to the recognition of sovereign wealth funds (SWFs) as a category of investors eligible to invest into the Indian markets as FIIs. This marks a significant move because it makes clear the Indian regulators’ policy approach towards SWFs in the Indian markets. It is also remarkable in a sense because several other countries are yet undecided as to their precise policy of regulating SWFs. The registration of SWFs with SEBI as FIIs would introduce transparency as they would be required to submit the requisite information to SEBI regarding their organisation and operations both at the time of registration and thereafter on a continuing basis. This would help overcome one of the key criticisms of SWFs that they are relatively opaque to the outside world. Further, limitations on FII investments in Indian companies such as the fact that they cannot invest more than 10% in a single company would operate as checks and balances against assertion of excessive influence by SWFs in the Indian marketplace.
However, the current policy pronouncement also leaves some matters open for interpretation. For instance, there seems to be nothing that requires SWFs to invest only through the FII route as a mandatory matter. This is only an option available to SWFs and they may possibly continue to invest under the foreign direct investment (FDI) route otherwise available to foreign investors, in which case they may not be subject to the 10% cap on investment in single companies and other transparency requirements. This dual regime available to SWF (i.e. both the FII route as well as the FDI route) may still leave room for ambiguity and interpretation, and hence a clarification on these matters would be most desirable.
Apart from enabling SWFs to invest as FIIs, the new amendments bring about some further changes to the FII Regulations, which are as follows (quoted from the SEBI circular):
* The policy measures on Offshore Derivative Instruments (Participatory Notes) and changes to the registration criteria specified in SEBI Press Release dated October 25, 2007 have been incorporated in the regulations.
* In order to streamline the process of registration, the Application Forms for grant of registration as a FII and Sub Account have been modified.
* An asset management company, investment manager or advisor or an institutional portfolio manager set up and/ or owned by non resident Indians (NRIs) shall be eligible to be registered as FII subject to the condition that they shall not invest their proprietary funds. This has been enabled by suitable modification to Explanation II under Regulation 13 of the said regulations.
* The type of securities in which FIIs are permitted to invest has been widened to include schemes floated by a Collective Investment Scheme.
Some press reports are available here: The Economic Times, IndianExpress.com.
External Commercial Borrowings Liberalised
In August 2007, the Government tightened its policies on external commercial borrowings (ECBs). However, subsequently, in view of the changed economic scenario in the country, it has decided to liberalise its policies on ECBs. In a circular issued yesterday, the Reserve Bank of India (RBI) now allows borrowers in the infrastructure sector to borrow up to US$ 100 million for permissible end uses under the approval route. In case of other borrowers, the existing limit of US$ 20 million for permissible end uses under the approval route has been enhanced to US$ 50 million. The allowable interest rates have also been increased.
This move would allow better scope Indian corporate to raise foreign currency borrowings as ECBs were largely curtailed since August 2007 until now. Livemint has a brief report on the possible effects of this liberalization.
Update – June 3, 2008: By way of another notification issued on June 2, 2008, the RBI has allowed borrowers in the services sector, viz. hotels, hospitals and software companies to avail of ECBs up to US$ 100 million, per financial year, for the purposes of import of capital goods under the automatic route.
This move would allow better scope Indian corporate to raise foreign currency borrowings as ECBs were largely curtailed since August 2007 until now. Livemint has a brief report on the possible effects of this liberalization.
Update – June 3, 2008: By way of another notification issued on June 2, 2008, the RBI has allowed borrowers in the services sector, viz. hotels, hospitals and software companies to avail of ECBs up to US$ 100 million, per financial year, for the purposes of import of capital goods under the automatic route.
A Progress Report on SEBI's Recent Initiatives
LiveMint carries a report analyzing SEBI’s progress under its new chairman, Mr. C. B. Bhave, who completes 100 days in office. While several initiatives have been taken in the primary and secondary markets, there seems to be a lot to be done as far as legal and investigation matters are concerned. The report states that “[t]he need to strengthen Sebi’s investigation and legal wings arises because instances of the appellate body, the Securities Appellate Tribunal or SAT, setting aside Sebi orders have been on the rise.”
Incidentally, SEBI has announced a few weeks ago that it invites applications for the Post of Executive Director (Legal) on contract or on deputation basis.
Incidentally, SEBI has announced a few weeks ago that it invites applications for the Post of Executive Director (Legal) on contract or on deputation basis.
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