In October 2008, Sebi had insisted on daily reporting after it found that FIIs were lending securities abroad. Sebi expressed its displeasure over such practices then. But now, with FIIs no longer lending their securities abroad, the regulator did away with daily disclosure requirements.
In 2008, Sebi had told all FIIs to submit information regarding securities lent to entities abroad on a daily basis to bring in more transparency.
However, on reviewing such data, it found FIIs had also sold securities on behalf of entities to whom it had lent. The regulator noted that FIIs had been lending securities to entities other than in the Indian securities market, ie, offshore derivative instruments (ODI) issued abroad. This could be termed as short selling in the Indian securities market.
Subsequently, the regulator expressed also its displeasure on FIIs lending abroad and asked them to reverse their position immediately.
These measures were implemented after Sebi found that around 34 participatory note (PN) issuing FIIs had lent over 3 lakh shares of Reliance Petroleum (RPL) and over 69,400 shares of Educomp Solutions to overseas entities resulting in a short sale in the Indian market.
Participatory Notes (PNs) are derivative instruments held by entities that are otherwise not allowed to invest in the Indian markets by the market regulator. FIIs buy India-based securities and then issue PNs to overseas entities who cannot access the Indian capital market directly. Since the facility of securities lending and borrowing (SLB) scheme was introduced in the Indian markets, the regulator wanted FIIs to use this mechanism instead of lending shares abroad.