The Hindu Business Line : Sub-accounts rising despite amendments to FII norms

Sub account registrations with SEBI rose by 156 to 4,626 in SeptemberFII registration with SEBI takes a very long time whereas sub account registration is much faster

Kripa Raman

Mumbai, Oct. 4

Despite SEBI trying to encourage foreign funds to come upfront and register as FIIs, the number of sub-accounts has been rising, even after the amendments to the FII regulations were notified this May.

SEBI's changes were in essence meant to discourage sub accounts, tighten issue of offshore derivative instruments and relax conditions for FII registration so that investors would "come directly through the front door as FIIs" as SEBI officials would often put it.

But even in September, a dark month indeed for financial entities worldwide, sub account registrations with SEBI rose by 156 to 4,626.

"Sub accounts are persons outside India on whose behalf investments are proposed to be made in India by an FII, and who is registered as a sub-account," according to the SEBI definition.

The reason for the rise in sub accounts is that FII registration with SEBI takes a very long time whereas sub-account registration is much faster, said Mr Anoop Narayanan, Partner at Majmudar & Co, international lawyers. India is still a better place for investment than many other countries at this juncture, and investors are finding ways to participate in the market, he said.

Although SEBI intended to relax conditions for FII registration, its amendments were more explicit and clear that the entities must be regulated and registered, and that has made matters tough. "We are finding that FIIs through the Mauritius route are being scrutinised in more detail by SEBI as opposed to other jurisdictions; and historically the Mauritius route has been used for investment in India," said an official with a law firm that advises FIIs.

There is greater scrutiny that the fund managers at FIIs are subjected to, including whether they have a hedge fund background, something frowned upon by SEBI, he said.

Under the May amendments, FIIs are responsible for all acts of omission and commission of all its sub accounts. They have to ensure KYC norms of sub accounts. The responsibility extended to not just registering sub accounts but also de facto, to say that sub accounts are observing the regulations. "At that time many FIIs had started to ask their sub accounts to wrap up and had decided to do only proprietary trading," said an official with a law firm. That NRIs could not register as sub accounts made sub account existence even more difficult, he said. Sub accounts could not issue offshore derivative instruments either.

But despite all this, sub accounts have only increased in number, because it is still the quickest way to participate in the market. "Registering a sub account is more like a client registration process, the FII registration process is tougher," said Mr J.M. Thakur, Chartered Accountant, who appears in SEBI related cases.

One other reason for the increase in sub accounts could be that while NRIs are not eligible to apply as sub accounts, there could be Overseas Corporate Bodies investing. Whether OCBs can invest or not as sub accounts has been subtly dropped in the amendments (the earlier proviso, that NRIs and OCBs registered with RBI cannot apply as sub accounts had been done away with), said legal experts.

Related Stories:
SEBI board reviews P-Notes data but takes no decision
P-Notes back on SEBI agenda
SEBI amendments to FII norms to discourage sub-accounts

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Sub-accounts rising despite amendments to FII norms