INDIA BUSINESS WORLD - OCTOBER 2006
THE MONTH THAT WAS...

FIIS WON'T BE ABLE TO BOARD THE BOURSES

Foreign portfolio investors are set to be barred from being represented on stock exchange boards in the upcoming policy on overseas investment in this financial segment. The government intends to permit foreign institutional investors (FIIs) to invest in shares of stock exchanges once they are listed — it reasons that their entry will boost liquidity in bourse stocks. However, to prevent conflict of interest arising out of trading and representation on management of exchanges, policy makers want to build in a restrictive clause in the regulations to keep out FIIs from the boards.

   The policy now being finalised envisages a 25% foreign direct investment and 24% for overseas portfolio investors. Although the government has travelled a fair distance on this policy compared to the earlier stance of treating investment in stock exchanges as strategic in nature, it wants to tread carefully. Hence the restrictive clause.

   In many countries, there are fetters on foreign investment in stock exchanges. For instance, in Australia the investment ceiling ranges between 5 and 15 %.

   Along the way, the idea of imposing a cap on voting rights for overseas investors just as in private banks was also mooted. However, this may not be reflected in the policy, officials said. The finance ministry has been in discussions with regulators in the financial sector — RBI and Sebi — on this issue. A final view is expected to emerge soon, an official said. Despite RBI's reservations on allowing foreign portfolio investment, the move is welcome elsewhere. Deutsche Borse has institutional investors accounting for around 97 % of the capital base. Overseas investment provisions are governed by Sebi norms and FEMA.