SEBI for foreign individuals on SEs

NEW DELHI, SEPT 6: With the stock markets nudging the magical 5000 mark, but not quite touching it for well over a week now, the market r...

NEW DELHI, SEPT 6: With the stock markets nudging the magical 5000 mark, but not quite touching it for well over a week now, the market regulator Securities and Exchange Board of India SEBI has stepped up its efforts to find fresh buyers with deep pockets. So, with the foreign institutional investors FIIs proving quite fickle in recent months, SEBI has now suggested that high net worth individual foreign investors be allowed to play the country8217;s stock markets. Senior SEBI officials met finance ministry officials last fortnight to press their demand for this, on hold since late last year.

Currently, the only foreigners who are allowed to invest in Indian stock markets are FIIs, non-resident Indians NRIs and overseas corporate bodies which are bodies floated by NRIs.

Curiously, the finance ministry which has been cold to the idea of allowing individual foreigners to invest in the market for over 10 months now 8212; SEBI gave the original proposal late last year 8212; is veering around to supportingSEBI8217;s proposal. The proposal will now be put to the High Level Committee which will meet next month. Among others, the committee consists of RBI Governor Bimal Jalan, Economic Affairs Secretary E A S Sarma and Joint Secretary Capital Markets J Bhagwati. Bhagwati was not available for comment, but a finance ministry official said that though the ministry8217;s view had not been finalised as yet, the current view is to support the proposal 8212; in which case, Jalan will be the final deciding authority.

So far, the ministry8217;s view has been that this will impart unnecessary volatility to the stock markets and will also open up the country8217;s stock markets to inflows of hot money.

While SEBI has met this argument by saying that a net worth criterion will be set for individuals who will be allowed to invest in the market, previous experience shows that safeguards don8217;t always work. For instance, when FIIs were first allowed to invest in the markets, the government had thought that the high capital gains tax onshort-term investments would deter FIIs from pulling out funds at will. What several FIIs did then was to register their India-related outfits in Mauritius, a tax-haven with which India has a double-tax avoidance treaty.

So, even if the FIIs pulled out their funds in the short-run that is, funds which were invested for less than a year in a particular stock, they didn8217;t have to pay any taxes 8212; under the treaty, they could not be taxed in India since they were Mauritius-based, and the Mauritian taxes were negligible. Last month, for example, when the FIIs were bearish on Indian stocks, they were easily able to turn into net sellers, and then returned to the markets a couple of weeks ago when they felt it looked better 8212; in 1998-99, the FIIs were net sellers, and withdrew investments of 355 million. On balance, the FII scheme has been beneficial and not too much volatility has been seen, but that has little to do with the scheme8217;s safeguards.