SEBI fears backdoor takeovers by FIIs through secondary market route

23 November 2006

Market regulator SEBI is worried about foreign funds using the secondary market route to take over Indian companies. It has written to the finance ministry, expressing this concern, says CNBC-TV18.

The finance ministry is grappling with a new problem — FDI through the secondary market route. Sources in the ministry say that recent cases of foreign funds, which include both private equity, and broad-base funds, picking up substantial stakes in Indian companies, can be a cause of worry because the source of such funds is unverifiable.

A letter by market regulator SEBI corroborates these concerns. SEBI had written saying the buyers are companies based in Mauritius with very low capital base, and on the face of it, just front companies. The funds, for the purpose of such takeovers, flow in via the foreign funds or PE fund route.

The finance ministry is worried that a similar situation could arise which could lead to asset stripping of cash rich Indian companies and thereby affect shareholder value.

As of now, foreign institutional investors can raise their stake in an Indian entity beyond 24 per cent if the concerned company's board passes a special resolution to that effect and the matter is being examined, official sources said.

Sources say the ministry has sought clarifications from the Reserve Bank of India under FEMA. SEBI has also said that there is no scrutiny of such takeovers by the Foreign Investment Promotion Board (FIPB) since foreign investment norms were liberalised earlier this year.