Unable to meet with the stringent regulations laid down by the Securities and Exchange Board of India (Sebi) to trade in the Indian equity markets, increasing number of Foreign Institutional Investors (FIIs) and sub-accounts have surrendered their accounts with the regulator. On April 15, 2010, Sebi had asked those foreign entities structured as Multi Class Vehicles (MCV) to broaden their investor base by having at least 20 individual investors, if they are maintaining a segregated portfolio for each classes of shares. The same was to be done by September 30, 2010.
Subsequently, the regulator issued a list of close to 190 FIIs and 350 sub-accounts which were non-compliant with the revised norms and therefore ineligible to trade in the Indian market. Out of these non-compliant entities, while there were only 12 FIIs and 125 sub-accounts that had surrendered their registration with the regulator after the new guidelines came into force, their number has now increased to 70 and 229, respectively.
An MCV is a structured entity in which investors in each class have different contractual agreement with FIIs or sub-accounts. The investment strategies, fund managers and liability of each class are different from others under such agreements.
Industry observers said that FIIs and Sub accounts which were having existing portfolio were rejigging their structure to meet the revised Sebi norms. Since September 2010, almost 18 FIIs and 16 sub accounts had managed to broad-base their investor base and became eligible for trading in the Indian market. According to them they had either raised fresh institutional money to broaden their investor base. Other who found it hard to raise fresh institutional funds had either consolidated their cells into one or had wound up some of their cells.
?However those entities which could not rope in fresh investors to meet the Sebi criteria are letting their registration lapse without going for renewal,? said a lawyer with a corporate advisory firm.
The regulators insistence on broadening the investor base was primarily a move to bring more transparency in fund operations, as these entities with different class of shares have investors, who are neither registered with Sebi nor directly monitored. They could potentially become a conduit for money laundering and round tripping activities.
To meet the Sebi specified broad-based criteria, each class or units should have a minimum of 20 individual investors in it or a minimum of three investors out of which at least one should be an institutional investor.