SEBI rules to close 'easy money' route for FIIs

Foreign institutional investors who are unable to certify that the money they manage has been raised from several offshore investors and not just a few will not be allowed to enter into new trades in the Indian stock market.

The Securities and Exchange Board of India has clarified that it will not extend the 30 September deadline for FIIs to restructure themselves as broad-based entities.

The regulator said on Thursday that non-compliant FIIs would not be allowed to take fresh positions from 1 October. ''Non-compliant and sub-accounts could either retain their current positions or sell off or unwind,'' the stock market regulator said in a statement from Mumbai. SEBI added that it would display the list of non-compliant entities on its website.

In April this year, SEBI had told FIIs and their sub-accounts - special purpose vehicles set up in tax havens like Mauritius - to give an undertaking that they are not multi-class share entities or a protected cell company.

Similar to a mutual fund, a multi-class structure allows distinct pools of investments, just like the various schemes of a mutual fund, under an umbrella asset management company. The investors putting money in various pools, which are referred to as 'cells' by market participants, can have different fund managers pursuing different investment strategies.

The fear was that while the umbrella firm gets registered as an FII or a sub-account, the regulator may have no control over the different pools or cells under the firm. And, once a multi-class share entity gets registration, it can go on adding new cells which, outside the regulatory radar, can be the conduits for round-tripping. Hundreds of foreign fund managers have been knocking on the doors of the regulator for more time to fall in line with new rules.