Sebi plans safeguards for overseas investors taking private bank route

The Securities and Exchange Board of India (Sebi) is planning checks and balances on overseas investors taking the ‘private bank route’ to invest in domestic markets. The move comes after several industry players expressed concerns that the new route allowed by the Sebi could be misused by investors, such as participatory notes (p-notes). Last week, the Sebi – through a circular titled “Easing of access norms for investment by foreign portfolio investors – allowed clients of private banks to trade in the Indian equities without having to register with the market regulator. While the Sebi has only given an in-principle nod to the proposal, regulatory sources said a fine print of the framework will be released by Sebi in the next one month. “I want to assure that the Sebi will put enough safeguards so that the route is not exploited. Only the banks which are ready to forego their client confidentiality agreements will be allowed to use the route,” said a Sebi official. It is also learnt that the Sebi will keep the investment structure tight — a stark difference from p-notes. Sources said the Sebi will only permit omnibus structures for the route.

In such a structure, a private bank will be allowed to have only a single portfolio and all the investments will be channelled through the same. “We will not allow segregated portfolio for the framework as it could be misused. Only fund structures will be permitted and there will be a common portfolio,” the official cited above said. On a positive note, the Sebi is planning to keep the route open for all classes of investors, including institutions and individuals. Interestingly, there seems to be a stark departure in the Sebi’s view on indirect participation of foreign investors in Indian markets. “Indirect participation is not a concern for us as long as we have information of the end beneficial owner,” a Sebi official said. Among other developments, the regulator seems to have taken a final call on issuance of p-notes from international financial services centres (IFSCs), such as the GIFT City in Gujarat. It is learnt that the Sebi is not inclined to allow p-note issuances from the GIFT City. The proposal has been under the regulator's consideration for the past one year as some of the big-ticket foreign institutions were keen on having such a framework. It could be very useful especially in the current circumstances where foreign funds have been stripped of p-notes and the Singapore Stock Exchange (SGX) route to invest in the Indian futures market.