The Hindu Business Line : US trade body calls for abolition of FII regime

ICI suggested that India should end the FII system as it stands today — a proposal that it feels would lead to larger inflows into the local securities market and adding to the "depth and breadth" of its trading.

KOLKATA, March 26

THE Investment Company Institute (ICI) of the US, the trade association representing over 8,000 American mutual funds, has appealed to the Securities and Exchange Board of India (SEBI) for abolition of the present FII regime and move towards what it calls "international investing norms".

A `comment letter' sent by ICI last month to SEBI has advised the regulator to adopt a single, uniform system for reporting significant portfolio holdings, or, at a minimum, exempt MFs, pension funds and other institutional players that are not investing for control, from reporting under the takeover regulations.

ICI has further urged the Indian authorities to allow FIIs to participate in the futures segment on "equal terms with domestic institutional investors".

The commentary, available on the institute's Web site (www.ici.org) , has suggested that India should end the FII system as it stands today — a proposal that it feels would lead to larger inflows into the local securities market and adding to the "depth and breadth" of its trading.

The present regime, it is noted, was established in 1992 as a means to allow overseas investors in the absence of a convertible rupee and as a way of protecting it — a rationale that is no more valid as India has been moving towards convertibility.

The institute has specifically advised SEBI to address issues related to FIIs' eligibility, documentation, sub-accounts and transfer of licences to successor entities. The following investment-related issues have also been underlined.

The current system of investing in IPOs is burdensome for FIIs, especially because it exposes them to additional settlement risk.

As for disclosure of significant holdings, FIIs need to file various reports at many thresholds.

FIIs are out of the ambit of securities lending.

The following are some recommendations:

There should be a system under which settlement for IPO shares would be accomplished on a DvP (delivery versus payment) basis.

Disclosure rules should help in balancing the market's need to know about accumulation of securities (by those who may seek control) with the burdens that frequent reporting can place on institutional investors who do not seek such influence.

Securities lending should be allowed under appropriate circumstances as income derived from such lending can either be added to a portfolio's return or be used to offset custody expenses. This increases portfolio yield to the benefit of shareholders. Incidentally, only five of the 52 nations covered by ICI's Foreign Investing Guide prohibit securities lending.

In conclusion, ICI has urged the regulator to both streamline the existing policy on FIIs and remove certain "disincentives". Both steps would help enhance the "long-range attractiveness of Indian investments".

`Trading collars' challenge: The US body has stated that movements in stock prices in India are subject to limits, sometimes termed as "trading collars". These vary (two, five and 10 per cent) from issuer-to-issuer.

"Trading collars present unique compliance challenges to US mutual funds," ICI has noted, adding that the Securities and Exchange Commission of the US is of the view that the US funds must determine the fair market value of securities that reach their trading limits.

In such a scenario, multiple collars tend to magnify compliance challenges. SEBI should choose a single percentage limit of at least 10 per cent that would apply to all Indian securities, ICI has suggested.

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