In the midst of rampaging bull run in the stock markets, market regulator Sebi, on Tuesday, proposed to curb foreign institutional investors (FIIs) from issuing offshore derivative instruments for which it has sought public comments over the next four days.

Aiming to check flow of funds from unknown entities, Sebi released a discussion paper in which it has sought comments by October 20 on various proposals including not to allow FIIs and their agents from issuing or renewing ODIs such as Participatory Notes, Equity Linked Notes and Capped Return Notes.

Wind up positions
Sebi has suggested directing FIIs to wind up their current positions over the next year and a half, during which the regulator would review the position from time to time.

"The year-on-year increase in ODIs, the anonymity that ODIs provide to investors, and the copious inflows into the country from foreign investors has been engaging the attention of the government and the regulators such as RBI and Sebi,” it said. The move comes within days of Finance Minister P Chidambaram expressing surprise and concern about surge in the markets, saying: “Sensex is driven by copious inflow of funds.”

At present, the number of FIIs and their agents issuing ODIs has increased to 34 from 14 in March 2004. The notional value of PNs outstanding has risen from Rs 31,875 crore in March 2004 to Rs 3,53,484 crore as of August this year.

The value of PNs issued comprised 20 per cent of assets under custody (AUC) of all FIIs/sub accounts as on March 14, 2004. Now, it has increased to 51.6 per cent of AUC. The value of ODIs with underlying as derivatives, whose issuance by FIIs SEBI wants to restrict, currently stands at Rs 1,17,071 crore, which is 30 per cent of total PNs outstanding.

Bearing on bourses
Sebi’s proposals may have a bearing on the stock markets, which have seen its benchmark Sensex gaining about 6,000 points in the current fiscal.

The market regulator gave only four days for public comments because of “urgency” in the matter.
Sebi also proposed a ban on further issuance of ODIs by agents of FIIs. "They will be required to wind up the current position over 18 months, during which SEBI will review the position from time to time," the discussion paper added. Further, Sebi wants to allow only those FIIs to issue further ODIs who have issued these instruments (excluding derivatives) to a level of less than 40 per cent of their assets under custody.