SEBI seeks further disclosures on participatory notes

Concerned about monies being routed into India via the Participatory Note("PN") route by short-term players such as hedge funds who even today don't find much favour from the SEBI with respect to FII registration and resident Indians who had parked monies overseas, the Securities Exchange Board of India ("SEBI") has considerably stepped up its initiative on disclosures regarding PNs with underlying Indian securities. Accordingly, new disclosure norms were issued by SEBI vide its Circular No. 8/2003 dated August 8, 2003 wherein certain reporting obligations were cast on Foreign Institutional Investors ("FIIs") in connection with issuance of offshore derivative instruments.

According to reports in financial dailies, the SEBI has filed a report with the Ministry of Finance, which analyses the PN route being used by FIIs. As per the SEBI report, 12 FIIs have issued PNs till September 2003, including FIIs like Goldman Sachs and Citigroup. SEBI claims that although these FIIs have disclosed the bulk of the information sought by SEBI, including confirmations that their associates/clients have not issued PNs directly/indirectly to Overseas Corporate Bodies, they have refused to provide certain details of their investment in India through the PN route e.g. the SEBI report alleges that Goldman Sachs has issued an INR 5 billion PN to Credit Suisse First Boston but has not disclosed the name of the ultimate beneficiary. SEBI has thus sought details from Goldman Sachs and Citigroup regarding full details of the beneficiaries of PNs issued by them. Further, as per the SEBI report, the total value of underlying investments in equity represented by the PNs is INR 19 billion, of the total net FII investment of INR 73 billion in equities till September 2003. Thus, the question here would be to what extent the SEBI would look through in case of PNs and how easy or comfortable the FIIs would be in making these disclosures and providing undertakings on behalf their clients.

Separately, it would be pertinent to note that the SEBI has made a partial modification to its earlier Circular No. 8/2003 vide a new Circular No. 9/2003 dated November 20, 2003 wherein it has been provided that FIIs who do not have any outstanding offshore derivatives shall be required to file a "NIL" report once a quarter as against the requirement to file details of PNs on a fortnightly basis. At the time of submitting the "NIL" report, the FII will also have to provide an undertaking that it shall submit the requisite details on a fortnightly basis as soon as it has issued or subscribed to any offshore derivative instrument. The first quarterly "NIL" report is to be submitted for the quarter ending December 2003.

Source: The Economic Times dated November 25, 2003 and Circular No. IMD/CUST/9/2003 dated November 20, 2003.

Participatory notes are instruments used by foreign funds / investors who are not registered with the SEBI but are interested in taking exposure in Indian securities Participatory notes are generally issued overseas by the associates of India-based foreign brokerages.

Here it would be pertinent to note as the enquiries by SEBI are confidential in nature, the details of the same are not available in public domain. This hotline has been prepared based on the newspaper reports published in this regard.

Overseas Corporate Bodies are entities are entities where 60% of the equity is held by non-resident Indians.