Mumbai: The Securities and Exchange Board of India (Sebi), India’s capital markets regulator, said on Monday evening that it “disapproves” of overseas lending and borrowing activity of stocks bought and held by some foreign institutional investors (FIIs) on behalf of other investors under the so-called participatory notes (PNs), although initial reports show such activity to be almost insignificant.
Sebi’s statement, which stopped short of spelling out penalties for overseas lending and borrowing of Indian stocks or the mechanism through which it hopes to stop these, comes after the removal, earlier this month, of a yearold ban on PNs which some analysts say could have led to a spike in overseas lending and borrowing of stocks.
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“Sebi disapproves the overseas lending and borrowing activity of FIIs and the consequent selling pressure in the cash market in India,” the statement said. Sebi has communicated this to FIIs.
“The lending and borrowing activity of FIIs is being monitored and if necessary stronger measures will be taken by Sebi, as considered appropriate,” the regulator said.
The Sebi “disapproval” is significant in the backdrop of local brokers, politicians and chief executives of some companies whose share prices have slumped sharply, crying foul at intense short-selling by FIIs.
Sebi had earlier denied the existence of a parallel offshore market. According to Sebi, revelation about such activity came after reviewing data submitted by FIIs.
Mint reported the existence of such a market on 12 August. FIIs had lent equities worth Rs348 crore to overseas entities for the purpose of short selling, during 10-14 October, as per Sebi data compiled from reports submitted by 17 FIIs.
This amount is very small compared to the size and trading volumes of Indian equity markets. Short sales involve the selling of stocks by investors who do not own these stocks and who, therefore, have to borrow them.
Last week, Sebi had asked FIIs to submit data twice every week on overseas lending and borrowing of stock.
During the first half of this year, many foreign entities not registered as FIIs in India, were queuing up to borrow stocks from the idle inventory of PN issuers to short local stocks.
Sebi’s blanket ban on issuing PNs on derivatives was an important factor that led to the creation and growth of a parallel overseas market for shortselling.
As a result of the ban, foreign entities, which wanted to take a negative view on Indian stock valuations and index levels, could not go short through buying such PN contracts from FIIs, pinned to local derivatives. The idle inventory of stocks held by FIIs on behalf of their clients was thus borrowed to set shorts abroad, which has strong and direct impact on the market valuations of the underlying stocks, traded on Indian bourses.
Early this month, Sebi lifted the ban on issuing PNs pinned to Indian stock derivatives and other curbs on the instrument, reversing its year-old agenda of gradually phasing out PNs, as part of a hunt for so-called “anonymous investors”.
Currently, if a non-registered foreign entity wants to go short on Indian stocks or stock index, it can simply buy such a contract from its client brokerage, which has an FII account.
FIIs, however, have already done enough damage to local stock valuations, as they have taken out about $12 billion from Indian equity markets this year, driving down India’s bellwether stock index Sensex, from 21,000 levels to sub-10,000 levels last Friday.
The benchmark index closed at 10,223.09, up 2.48% or 247.74 points on Monday. Sebi is also taking a relook at the local stock lending and borrowing norms. “Sebi is reviewing the difficulties in the use of the lending borrowing facility and would be taking steps to make this mechanism more effective,” the regulator said.
Khushboo Narayan contributed to this story.