In a discussion paper issued today, Sebi said that FIIs and their sub-accounts should not issue or renew ODIs with underlying as derivatives with immediate effect. “They are required to wind up the current position over 18 months, during which period Sebi will review the position from time to time,” it said, inviting comments from the public about the new proposals

Foreign institutional investors that are currently issuing ODIs with notional value of PNs outstanding (excluding derivatives) as a percentage of their assets under custody (AUC) in India of less than 40 per cent should be allowed to issue further ODIs only at an incremental rate of 5 per cent of their AUC in India. Those FIIs with notional value of PNs outstanding (excluding derivatives) as a percentage of their AUC in India of more than 40 per cent should issue PNs only against cancellation or redemption or closing out of the existing PNs of at least equivalent amount.

“Though it’s only a proposal, the Sebi move will halt the foreign institutional investor-led rally for the time being. We can expect a correction on Wednesday,” said a fund manager. The Sebi move follows huge FII inflows in the last one month. The Sensex has risen by over 5,000 points in the last two months on the back of FII inflows. FIIs have invested over $5.45 billion in October alone, taking the total investment for the year 2007 to $ 17.69 billion.

The huge inflows have pushing up the rupee’s value against the dollar. The market ended flat today amidst speculation that the regulator would come out with some measures to stop the bull frenzy.

The year-on-year increase in ODIs, the anonymity that the ODI provides to investors, and the copious inflows into the country from foreign investors have been engaging the attention of the Government and regulators such as the Reserve Bank of India and Sebi.

“This has been a topic of discussion ta many fora such as the High Level Committee on Capital Markets (HLCC) and various committees set up by the government and regulators,” the Sebi paper said. The committee had earlier made certain recommendations which included issuance of PNs only to regulated entities subject to KYC requirements. This was implemented through suitable amendment to foreign institutional investor regulations three years ago.

Growing PN investment

•The notional value of PNs outstanding, which was at Rs 31,875 crore (20 per cent of AUC) in March 2004, has grown to Rs 3,53,484 crore (51.6 per cent of AUC) by August 2007

•The value of outstanding ODIs with underlying as derivatives currently stands at Rs 1,17,071 crore, which is approximately 30 per cent of total PNs outstanding

•The notional value of outstanding PNs, excluding derivatives as underlying as a percentage of AUC is 34.5 per cent at the end of August 2007

•Currently, 34 FIIs and sub-accounts issue offshore derivative instruments (ODIs) against 14 in March 2004

New Sebi Agenda

•FIIs and their sub-accounts should not issue or renew ODIs with underlying as derivatives. They should wind up the current position over 18 months

•Further issue of ODIs by sub-accounts of FIIs will be discontinued. They will have to wind up the current position over 18 months

•FIIs that are currently issuing ODIs with notional value of PNs outstanding (excluding derivatives) as a percentage of their AUC of less than 40% can issue ODIs only at the incremental rate of 5% of their AUC

•FIIs with notional value of PNs outstanding (excluding derivatives) as a percentage of their AUC in India of more than 40% should issue PNs only against cancellation or redemption of existing PNs