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Our Bureau

Mumbai, Oct. 20 SEBI has warned FIIs that overseas lending and borrowing of Indian securities could result in stern measures.

In a news release issued on Monday, SEBI said it disapproved of the overseas lending and borrowing activity of FIIs and the consequent selling pressure in the cash market in India.

“The lending/borrowing is being monitored and if necessary, stronger measures will be taken by SEBI as considered appropriate,” it said.

SEBI had last week asked FIIs and their sub-accounts to submit details of Indian securities lent by them overseas.

SEBI would collate them and post the details twice a week — Tuesday and Friday — on its Web site. The first posting was done last Friday.

“We have expressed our disapproval to the FIIs,” Chairman of SEBI, Mr C.B. Bhave, said on the sidelines of a function in the city on Monday.

He would not elaborate on what the strong measures could be. “We looked at the first set of data on Friday. Another set will arrive tomorrow (Tuesday),” he said.

“There is no predetermined time frame for the steps we might take.”

SEBI wants the data to see if there is any correlation between overseas lending of these securities and domestic sale of shares by FIIs. That FIIs have sold equities worth more than $11 billion in 2008, dragging down Indian stocks, has been of concern to the Government and the regulatory authorities.

SEBI is apprehensive of FIIs selling the securities as P-Notes to other FIIs, who could involve in short selling.

“But instead of borrowing securities from the Securities Lending Borrowing mechanism recently put in place by SEBI, these FIIs could be trying to buy in the cash market here. I think SEBI prefers a more transparent system and wants them to use the domestic SLB system,” said a senior official with a legal firm that advises international clients.

But when this happens overseas, there is no control over who is buying and who is borrowing, he said.

“This could be one reason why SLB has not taken off in the Indian market.”

The SEBI news release states: “While the stock lending mechanism has been made operational in the Indian market, SEBI finds that this facility has not been used by the institutions. SEBI is reviewing the difficulties in the use of the facility and would be taking steps to make this mechanism more effective.”

Legal advisors to FIIs said it would be very difficult to monitor any borrowings or transactions beyond the FII level. If it involves an entity that is not an FII, then it would be beyond SEBI’s purview, they said.

However SEBI’s demand for details of lending of Indian securities by FIIs could be a deterrent, they said.

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