INTRODUCTION:

The Capital is responsible for catapulting a countries growth and development. One of the
notable economist1 is of the opinion that capital invested in the economy is directly
proportionate to its growth. The capital can finance in different ways, and modes of funding2
depends upon the economic system a particular country has adopted. In context of developing
country the milieu changes slightly because, due to its developing needs, its appetite much
more than its developed counterparts. Thus along with the domestic sources (public and
privet) it also tries to tap foreign source for its capital need. The Foreign capital can come in
by Direct route and Indirect route, meaning there by foreign direct investment or portfolio
investment. The both the investment are made with different purpose, the direct route is often
used by an investor for capital appreciation and control where as portfolio investment are
made to take benefit of any particular trends3 or price appreciation. The foreign capital is
often is cheap mode of financing compared to the domestic capital, but if no proper
regulatory mechanism is not in place it might be very risky also, Asian Tiger crisis is one of
such example. The capital streaved countries, often are caught “catch 22” situation, in one
hand they need to maintain capital inflow and side by side they had to implement stringer
regulatory norms, the irony of the situation is if the regulatory norms are too much tight than
overseas investor will hesitate, and if it is loose than the investment will ‘fly by night’. Thus
there remains a constant tassel of interest between policy maker4 and the overseas investors5.
As per the Report of the Working Group on Foreign Investment6 , Indian the institutional
bodies regulating capital flows include the Reserve Bank of India, the Securities and
Exchange Board of India (“SEBI”), the Forward Markets Commission (“FMC”), the
Insurance Regulatory and Development Authority (“IRDA”), and the Pension Fund
Regulatory and Development Authority (“PFRDA”). Within the Government of India, the
Ministry of Finance houses the Department of Revenue, the Department of Economic Affairs
(“DEA”) and the Department of Financial Services. The Department of Revenue hosts the

1
Michael Emmett Brady” The Applied Mathematics of J.M. Keynes' Theory of Effective Demand in the General
Theory” Michael Emmett Brady, 2004 p247.

2
In Socialist Pattern, it often financed through Public Debt, or Govt. debt, in Capitalistic set up is by the both
process govt. debt and privet contribution, now privet contribution can be from in both way in equity and
debt. But predominated by Privet contribution.
3
Trends here mean Bullish and Bearish trends.
4
Regulator, in the case of India RBI or SEBI
5
Here it includes venture capital, Mutual Funds, Collective investment Scheme, NRIs etc.
6
The committee was set up by finance ministry, to evaluate the prospect of Foreign investment in India , the
report can be find in www.finmin.nic.in/reports/WGFI.pdf visited on 02/09/2010

1|Page
Central Board of Direct Taxes (“CBDT”). DEA hosts the Capital Markets Division while the
Department of Financial Services deals with banks, insurance and pension funds and their
respective regulators. Minister heads the Foreign Investment Promotion Board (“FIPB”)
which approves foreign direct investment, on a case by case basis, into the country. The
Ministry of Commerce and Ministry of Finance hosts the Department of Industrial Policy and
Promotion (“DIPP”) which is responsible for promulgating policy on foreign direct
investment into the country.
The regulatory framework controlling the foreign investment can be diagrammatically
represented as below:
Figure 1

RBI SEBI FIPB

FII FCVI NRI OTHERS

The Finance
Listed Equity Unlisted Equity Debt

CBDT Taxation Policy DEA FII, FCVI, NRI,FEMA

2|Page
Further RBI is given primary authority to regulate capital flows through the Foreign
Exchange Management Act (“FEMA”), 1999. Notably, Section 6 7of FEMA authorizes the
RBI to manage foreign exchange transactions and capital flows in consultation with the
Ministry of Finance.

Foreign Investments in India—Schematic Representation:8

Figure 1.1

Thus it becomes clear the need of foreign investment and the modes that presently used by
the authorities to attract foreign capital, side by side the authorities responsible to check and
monitor the various routes of investment inflows. But the foreign capital inflow can be
broadly categorised in two FDI and FPI (Foreign portfolio Investment), and in FPI category
is FIIs (Foreign Institutional Investor) which contribute largely in this growing economy.

7
Foreign Exchange Management Act, 6 (1999)(stating that the Reserve Bank may, in consultation with the
Central Government, specify (a) any class or classes of capital account transactions which are permissible; (b)
the limit up to which foreign exchange shall be admissible for such transactions, and further granting the RBI
the authority to prohibit, restrict or regulate specific forms of financial transactions such as those involving
debt, equity, currency and property). Note that the Government has powers under Sections 40 and 41 of
FEMA, as well as Sections 16 and 17 of the SEBI Act of 1992, to suspend operations of FEMA and direct the
Reserve Bank or SEBI respectively, where the Government considers it necessary or expedient to do so in the
public interest. However, these provisions are understood to be emergency provisions not applicable to more
routine issues of financial regulation.
8
As per the RBI master circular on foreign investment in India 2010, circular no. Master Circular No.13/2010-
11

3|Page
ANALYSIS OF FOREIGN INSTITUIONAL INVESTOR: POLICY

India’s decision to allow “foreign institutional investors” the ability to bring and take money
into and out of the economy, without quantitative restrictions has been a historic occasion in
the country’s economic history.9 From the perspectives of macroeconomic policy, the
decision to allow FII participation in the economy has moved the country in the direction of
full capital account convertibility. Considerable benefits have been obtained for the Indian
economy from these reforms. An analysis of the balance sheet of 6626 listed firms on 31
March 2009 shows FII investments of market value of Rs.3.639 trillion. This made up 19.01
percent of the overall net worth of these firms. The overall balance sheet size of these firms
was Rs.86.02 trillion or 164.51 percent of 2008-09 GDP.10
But up till 1990’s the situation was not like this, even though it was having one of the oldest
stock market11 in the developing country, by far the market was very thin. It was an age
characterized by govt pervious permission before accessing capital market import
subsidization and self reliance, further there was general disinclination towards foreign
investment, mounting balance of payment deficit and Gulf crisis has forced India to
reconsider its stand on “importation” of Capital. The govt constituted a high level
committee12 on Balance of payment, the committee recommended, “inter alia, a
compositional shift in capital flows away from debt to non-debt creating flows; strict
regulation of external commercial borrowings, especially short-term debt; discouraging
volatile elements of flows from non-resident Indians (NRIs); gradual liberalisation of
outflows; and disintermediation of Government in the flow of external assistance”13

 Foreign Institutional Investor Guideline 1992:

On 14th September Ministry of Finance issued a press note14 elaborating the guidelines for
FIIs and OCBs (Overseas Corporate Bodies)15, via which they are permitted to invest in

9
Govt. policy on FII guideline 1992
10
Report on Working committee on Foreign investment in India. www.finmin.nic.in/reports/WGFI.pdf
11
Bombay Stock Market is more than hundred years old.
12
As per the article on ”Foreign Institutional Investor in India” http://www.scribd.com/doc/23325785/FIIs-in-
India visited on 05/09/2010
13
Ibid
14
http://finmin.nic.in/the_ministry/dept_eco_affairs/investment_div/invest2.htm visited on 05/09/2010
15
An OCB is a company, partnership firm, society and other corporate body owned directly or indirectly to the
extent of at least sixty per cent by NRIs and includes overseas trust in which not less than sixty per cent benefit
cial interest is held by NRIs directly or indirectly but irrevocably.

4|Page
India. The press note provided for which are the institution that can be registered as FII and
it include AMCs, Pension fund, Mutual fund etc.16 The policy framework also permitted FII
investment was provided it obtain an initial registration with SEBI and also RBI’s general
permission under FERA. Both SEBI’s registration and RBI’s general permissions under
FERA were to hold good for five years and were to be renewed after that period. RBI’s
general permission under FERA could enable the registered FII to buy, sell and realise capital
gains on investments made through initial corpus remitted to India, to invest on all recognised
stock exchanges through a designated bank branch, and to appoint domestic custodians for
custody of investments held. The Government guidelines of 1992 also provided for eligibility
conditions for registration, such as track record, professional competence, financial
soundness and other relevant criteria, including registration with a regulatory organisation in
the home country. The guidelines were suitably incorporated under the SEBI (FIIs)
Regulations, 1995. The further regulations continue to maintain the link with the government
guidelines by inserting a clause to indicate that the investment by FIIs should also be subject
to Government guidelines. This linkage has allowed the Government to indicate various
investment limits including in specific sectors. The governmental policy towards FIIs can be
summarised as follows:
YEAR POLICY CHANGE
September 1992 FIIs allowed to invest by the Government Guidelines in all
securities in both primary and secondary markets and schemes
floated by mutual funds. Single FIIs to invest 5 per cent and all FIIs
allowed to invest 24 per cent of a company’s issued capital. Broad
based funds 17to have 50 investors with no one holding more than 5
per cent. The objective was to have reputed foreign investors, such
as, pension funds, mutual fund or investment trusts and other broad
based institutional investors in the capital market.

16
As per the Para 2 of the pressnote “2. Foreign Institutional Investors (FIIs) including institutions such as
Pension Funds, Mutual Funds, Investment Trusts, Asset Management Companies, Nominee Companies and
Incorporated/Institutional Portfolio Managers to their power of attorney holders (providing discretionary and
non-discretionary portfolio management services) would be welcome to make investments under these
guidelines.”
17
FII Regulation1992 6(d) explanation: Broad Based funds: For the purposes of this regulation, "broad
based fund" means a fund, established or incorporated outside India, which has at least 50 investors, with no
single individual investor holding more than 5% of the shares or units of the fund:

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November 1996 100 per cent debt FIIs were permitted to give operational
flexibility to FIIs.18
April 1997 The applicant are governed by Fit and Proper regulation.19 Further
it was also allowed to invest in the Government securities.20
April 1998 FIIs permitted to invest in dated Government securities subject to a
ceiling. Consistent with the Government policy to limit the short-
term debt, a ceiling of USD 1 billion was 21assigned which was
increased to USD 1.75 billion in 2004
June 1998 Aggregate portfolio investment limit of FIIs and NRIs/PIOs/OCBs
enhanced from 5 per cent to 10 per cent and the ceilings made
mutually exclusive. Common ceilings would have negated the
permission to FIIs. Therefore, separate ceilings were
Prescribed.
June 1998 Forward cover allowed in equity. FIIs permitted to invest in equity
derivatives. The objective was to make hedging instruments
available.22
February 2000 Foreign firms and high net-worth individuals permitted to invest as
23
sub-accounts of FIIs. Domestic portfolio manager allowed to be
registered as FIIs to manage the funds of sub-accounts. The
objective was to allow operational flexibility and also give access

18
FII Regulation (Amendment) 1996 15(2) proviso “Provided that nothing contained in sub-regulation (2) shall
apply to any investment of the foreign institutional investor either on its own account or on behalf of its sub-
accounts in debt securities which are [unlisted or ] listed or to be listed on any stock exchange if the prior
approval of the Board has been obtained for such investments."
19
FII regulation (amendment) 1997 Regulation 13 (1) (bb) “the applicant is a fit and proper person.”
20
FII regulation (amendment) 1997 Regulation 15 (2) Explanation
21
Securities and Exchange Board of India (Foreign Institutional Investors) Amendment Regulations, 1998 vide
notification no.S.O.417(E) dated 18.5.98
22
SEBI (FII) (Third Amendment) Regulations, 1998, w.e.f. 30-6-1998, read as under: “(A) the Foreign
Institutional Investor shall transact business only on the basis of taking and giving deliveries of securities
bought and sold and shall not engage in short selling in securities: Provided that nothing contained in clause (a)
shall apply in respect of transactions in derivatives traded on a recognized stock exchange;”
23
SEBI (Foreign Institutional Investors) (Amendment) Regulations, 2000, w.e.f.29-2- 2000 read as under: "sub-
account" includes [foreign corporates or foreign individuals and] those institutions, established or
incorporated outside India and those funds, or portfolios, established outside India, whether incorporated or
not, on whose behalf investments are proposed to be made in India by a Foreign Institutional Investor.”

6|Page
 to domestic asset management capability.
May 2001 Declaration of its interest in case of Investment Advice via public
Media24 and Appointment of Compliance officer 25

September 2001 Security receipts 26 and was included in the investible security.

December 2003 FII dual approval process of SEBI and RBI changed to single
approval process of SEBI. The objective was to streamline the
registration process and reduce the time taken for registration.
Further it code of conduct27 was made uniformly enforced
February 2004 Sale securities with out stock broker in case of, offer made by a
acquire or promoter for delisting of securities.28. Stringent KYC
norms are brought into existence, and time limit was 5 years29 from
the date of notification or contract whichever is earlier, In case of
contract is issued to overseas entity which is not registered.
November 2004 Outstanding corporate debt limit of USD 0.5 billion prescribed.
The objective was to limit short-term debt flows
April 2006 Outstanding corporate debt limit increased to USD 1.5 billion
prescribed. The limit on investment in Government securities was
enhanced to USD 2 bn. This was an announcement in the Budget

24
Regulation !7 A Inserted by the SEBI (Investment Advice by Intermediaries) Regulations, 2001 w.e.f.
29.5.2001
25
Regulation 19 A SEBI (Foreign Institutional Investors) Amendment Regulations, 2001 w.e.f. 13.2.2001
26
Inserted by the SEBI (Foreign Institutional Investors) Amendment Regulations, 2001 w.e.f. 13.2.2001
27
Regulation 7A inserted by SEBI (Foreign Institutional Investors) (Second Amendment) Regulations,
2003 w.e.f. 28.8.2003.
28
Regulation 15(3)(c) proviso II, Inserted by the SEBI (Foreign Institutional Investors) (Second Amendment)
Regulations, 2004 w.e.f. 19.2.2004.
29
15A.(1) as amended by SEBI (Foreign Institutional Investors) (Second Amendment) Regulations, 20004 w.e.f.
3.02.2004 read as under: 15A. (1) “A Foreign Institutional Investor or sub account may issue, deal in or hold,
off-shore derivative instruments such as Participatory Notes, Equity Linked Notes or any other similar
instruments against underlying securities, listed or proposed to be listed on any stock exchange in India, only
in favour of those entities which are regulated by any relevant regulatory authority in the countries of their
incorporation or establishment, subject to compliance of "know your client" requirement: Provided that if any
such instrument has already been issued, prior to 3rd February 2004, to a person other than a regulated entity,
contract for such transaction shall expire on maturity of the instrument or within a period of five years from
3rd February, 2004, whichever is earlier. (2) A Foreign Institutional Investor or sub account shall ensure that no
further down stream issue or transfer of any instrument referred to in sub-regulation (1) is made to any person
other than a regulated entity."

7|Page
 of 2006-07
30
June 2006 The 100% investment is allowed in security receipts; issued
AMC
November, 2006 FII investment up to 23% permitted in infrastructure companies in
the securities markets, viz. Stock exchanges, depositories and
clearing corporations.
This is a decision taken by Government following the mandating of
demutualization and corporatization of stock exchanges
January 2007 Domestic players are not allowed to registered as FIIs(definition of
Domestic AMC, portfolio manager deleted)31
October, 2007 The FII are allowed Short Selling32
FIIs allowed to invest USD 3.2 billion in Government Securities
(limits were raised from USD 2 billion in two phases of USD 0.6
billion each in January and October33)
May 2008 The Board allowed newly formed FIIs34 to enter into Indian
market, further University funds, Sovereign Wealth Fund, Charity
trust etc are also allowed. Further individual contribution is
increased to 49 %35. The continuation registration was
implemented
June, 2008 KYC norms made necessary before opening Sub-account36 further
who can apply for sub account and the monetary qualification is
also attached37. The liability of the FII was increased and they will

30
Regulation 15(2) fourth provision Inserted by the SEBI ((Foreign Institutional Investors) Amendment
Regulations, 2006, w.e.f 26.6.2006.
31
Regulation 2cc Omitted by SEBI (Foreign Institutional Investor) (Amendment) Regulations, 2007 w.e.f.
8.1.2007.]
32
Regulation 15(3)(c) Substituted by the SEBI (Foreign Institutional Investors) (Second Amendment)
Regulations, 2007 w.e.f. 21.4.2008
33
Regulation 15(8) Substituted by the SEBI (Foreign Institutional Investors) (Second Amendment) Regulations,
2007, w.e.f.31-12-2007. Prior to substitution Regulation 15(8) read as under
34
Regulation 6(1)(a) Inserted by the SEBI (Foreign Institutional Investors) (Amendment) Regulations, 2008,
w.e.f.22-5- 2008.
35
Regulation 15 Explanation
36
Regulation 12 Proviso inserted by the SEBI (Foreign Institutional Investors) (Amendment) Regulations, 2008,
w.e.f.22-5-2008.
37
Regulation 13(a) inserted by the SEBI (Foreign Institutional Investors) (Amendment) Regulations, 2008,
w.e.f.22-5-2008.

8|Page
 now be responsible for the act of omission and commission in all
sub- account38. The FII are bared from issuing Offshore Derived
without following the norms laid down in the regulation (Proper
KYC)39 . The amendment also banned sub-accounts from issuing
further OSD, previous OSD has to be cancelled march 2009 In case
of any violation40 by a foreign institutional investor they will be
charged under SEBI(Intermediaries) Regulation also
June 2008 While reviewing the External Commercial Borrowing policy, the
Government increased the cumulative debt investment limits from
US $3.2 billion to US $5 billion and US $1.5 billion to US $3
billion for FII investments in Government Securities and Corporate
Debt, respectively41.

38
Regulation 13A
39
Regulation 15 A
40
Regulation 21A
41
As per Circular No. IMD/FII & C/ 29 /2007

9|Page
A CRITIQUE of FII REGULATION(1995) IN LIGHT OF SOME RECENT
JUDGEMENTs

1. UBS Securities Asia Ltd Vs. Securities and Exchange Board of India42
(Black Monday: Biggest Intraday crash)

Background of the case:

a. May 17, 2004, a dark day in the stock market history is, termed appropriately
as the Black Monday by the market pundits. Sensex had shed nearly 800 points
in intra-day trades and ended over 500 points lower. The sharp fall had led to
the suspension of trading twice during the day and the Bombay Market
crashed as much as 17.5%. On the infamous bit, it was the biggest intraday
crash in the 129 year history of the exchange and the day ended at:
Sensex recovered to reach 4505.16 and it suffered a loss of 564.71 points.
Nifty ended at 1388.75 and it suffered a loss of 564.71 points.
b. SEBI being the market regulator initiated the enquiry, in the process it found
out that one UBS was a selling client who sold 188.35 core, which almost
amounted 3% of the market43.In the process of enquiry it was found that the
sale was on UBS sub-account, which was Swiss Finance Corporation
(Mauritius) Limited (SFCML), SFCML acted on behalf of UBS AG
London.UBS AG was instructed to sale by its clients including one Caxton
International, hedge fund registered in BVI44 , which alone amounted for
99.05. core. The Caxton International is managed by a Caxton Associate an
US based entity. SEBI instructed UBS securities to find out the seller’s
identity or the investors of Caxton Associate. But after repeated request UBS
was reluctant to provide the identities. SEBI in the mean time also requested
Caxton Associate for revelling the same but there was no result. Finally Sebi
approached Security Exchange Commission for the agreement between
Caxton Associate and UBS AG to identify the investors, the agreement
revelled Indian names. SEBI was able to prove how Indian money is routed

42
2005)6CompLJ64(SAT)
43
BSE and NSE taken together cash segment 6,092 core
44
British Virgin Island

10 | P a g e
 through Mauritius to London to BVI to US and re-enter in India in the form of
Participatory Note. Having finished the investigation, SEBI banned UBS and
its affiliated agents for one year from issuing any ODIs (offshore Derivative
instruments) based on any Indian Security.

Appeal to SAT:
Being aggrieved by the decision of SEBI, UBS appealed to Security
Appellate Tribunal, SEBI banned the UBS on following factors-
a. Directive under Regulation 15 A45 FII Regulations: It regulation forces
FIIs to comply with International Practice of KYC norms before issuing any
ODIs.
b. Internal guidelines of UBS and KYC Directions: The KYC mandate’s
operator to find out who are the ultimate beneficiaries from a particular
transaction, and Customer Identification Program was drafted in this line only.
Thus there was a clear violation KYC mandate.
c. Non-compliance with regulation 20 and 20 A46: SEBI in it impugned order
also alleged that UBS has also not complied with the aforementioned
regulation, which directs any FIIs to disclose any information of PN, to Board
or either RBI when been requested; it was also brought on record that UBS
was doing partial discloser, about facts of top five shareholder and top five
investors, hence it was inferred that even though UBS was able to access the

45
Regulation 15 reads as 15A. (1) A Foreign Institutional Investor or sub-account may issue, deal in or hold, off-
shore derivative instruments such as Participatory Notes, Equity Linked Notes or any other similar instruments
against underlying securities, listed or proposed to be listed on any stock exchange in India, only in favour of
those entities which are regulated by any relevant regulatory authority in the countries of their incorporation
or establishment, subject to compliance of “know your client” requirement :
“Provided that if any such instrument has already been issued, prior to the 3rd February, 2004, to a person
other than a regulated entity, contract for such transaction shall expire on maturity of the instrument or within
a period of five years from the 3rd February, 2004, whichever is earlier. “
(2) A Foreign Institutional Investor or sub-account shall ensure that no further downstream issue or transfer of
any instrument referred to in sub-regulation (1) is made to any person other than a regulated entity.”
46
Regulation 20. Every Foreign Institutional Investor shall, as and when required by the Board or the Reserve
Bank of India, submit to the Board or the Reserve Bank of India, as the case may be, any information, record or
documents in relation to his activities as a Foreign Institutional Investor as the Board or as the Reserve Bank of
India may require.
Regulation 20-A. Foreign Institutional Investors shall fully disclose information concerning the terms of and
parties to off-shore derivative instruments such as Participatory Notes, Equity Linked Notes or any other such
instruments, by whatever names they are called, entered into by it or its sub-accounts or affiliates relating to
any securities listed or proposed to be listed in any stock exchange in India, as and when and in such form as
the Board may require.

11 | P a g e
 information but was withholding the same form the board. Resulting a clear
violating of the mandate
d. Non- adherence of code of conduct: UBS was also charged for non-
adherence of code of conduct (code 1, 2,5, and 7) of FII regulation, thus
cannot exercise due diligence.
e. Hindering the Investigation: SEBI also observed that the UBS has taken a
non-cooperative stand after the ‘Black Monday’, and even after repeated
request it did not forwarded the names of the ultimate beneficiaries of the
transaction.
SAT’s finding: SAT reversed the order of the SEBI sighting following reasons
a. The mandate of KYC requirement: Tribunal was of the view that the KYC
mandate provided in the Regulation was vague and not clear thus cannot take
any definitive precession. Further mentioning the ultimate beneficiaries was
not provided in the regulation, it can be found in the SEBI (stockbroker)
regulation but no such amendment were made under FII regulation.
Furthermore the international practice also does not emphasise on this point.
b. The mandate under regulation 20 and 20A: Tribunal opined that the there
was no express mandate to declare top 5 investor or share holder. Further UBS
communicated in phased manner, and under protective communication
requirement.
a. Benefit to the Accused: SAT relied on the known interpretation of law that
whenever there is a penalty imposed, the provision is to be interpreted in a
strict manner and that whenever there are two interpretations possible, benefit
should go to the accused.
The judgement in this case has force legal pundits to question the effectiveness of the SEBI,
in protecting the investor interest, and smooth functioning of stock market. As been provided
under the preamble of SEBI act that Board will try to protect the interest of the investor
community a large and take all necessary step for eliminating all manipulative acts, but the
reversal by the Tribunal in this case put question on the competence of SEBI in relation to its
implementation of law. Thus it lead to series of amendment in the FII regulation to make it
more effective.

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Post UBS KYC norms (amendment): The KYC as of now stands and provides for
following to be abided by any FIIs while issuing, ODIs or PN
I. Any FII before opening any sub-account shall verify by itself and if only satisfied
regarding its identity47, than only it should apply for its registration. Thus via this a
positive duty is casted on the FIIs to exercise complete due-diligence and find out the
identify of ultimate beneficiaries.
II. The Post amendment law forbids the FIIs form issuing or dealing in ODIs both
directly or indirectly.48
III. Any ODIs issued has to be done only after doing complete KYC49
IV. Board before allowing any FII to be registered, board can test 50the application under
Fit and proper regulation.
V. Every FIIs is now govern under SEBI (intermediaries) Regulations. And can also be
penalised under the same51
52
VI. The counter party receiving ODIs should be regulated must be a person regulated
appropriate foreign regulatory authority53 it further provided that in case it is issue to
any unregulated party it should be either cancelled or redeemed or closed before 31st
March 2009.

47
Regulation 12(1) Provision Provided that before making an application for registration on behalf of a
proposed sub-account being a foreign corporate, the foreign institutional investor shall verify the necessary
details and documents and satisfy itself about the identity of the proposed sub-account after applying its know
your client procedure. Proviso inserted by the SEBI (Foreign Institutional Investors) (Amendment) Regulations,
2008, w.e.f.22-5-2008.
48
Regulation 15 A(1)
49
Regulation !5A(1)(b)
50
Regulation 6A: For the purpose of determining whether an applicant or foreign institutional investor is a fit
and proper person the Board may take into account the criteria specified in Schedule II of the Securities and
exchange Board of India (Intermediaries) Regulations, 2008. Inserted by inserted by the SEBI (Foreign
institutional Investors) (Amendment) Regulations, 2008, w.e.f.22-5-2008.
51
Regulation 21A A Foreign Institutional Investor who contravenes any of the provisions of the Act, rules or
regulations framed there under shall be liable for one or more actions specified therein including the action
under Chapter V of the SEBI (Intermediaries) Regulations, 2008 Inserted by inserted by the SEBI (Foreign
institutional Investors) (Amendment) Regulations, 2008, w.e.f.22-5-2008.
52
Regulation 15A(1)(a)
53
Regulation 15 A Explanation II: For the purposes of sub-regulation (2) and the proviso
thereto, the expression “person regulated by an appropriate foreign regulatory authority” means and includes
the following, namely:-
(i) any person that is regulated/supervised and licensed/registered by a foreign central bank;
(ii) any person that is registered and regulated by a securities or futures regulator in any foreign country or
state;
(iii) any broad based fund or portfolio incorporated or established outside India or proprietary fund of a
registered foreign institutional investor or university fund, endowment, foundation, charitable trust or
charitable society whose investments are managed by a person covered by clauses (i), or (ii) above.

13 | P a g e
 VII. Same rule applies to Sub account holder they are also prohibited from issuing
ODIs, without complying norms of Regulation 15A (6) 54of FII Regulations

2. Goldman Sachs Investments (Mauritius) Limited Vs. The Adjudicating Officer,

Securities and Exchange Board of India55

Background of the Case

a. With a view to regulate the activities of FIIs and their sub-accounts, the Board
under Regulation 20 of FII regulation 1995 issued a circular calling upon some
information to be submitted by the FIIs.
b. The rationale behind such a circular was that, Board found that some FIIs were
issuing derivatives/financial instruments against underlying Indian securities under
different names such as participatory notes, equity linked notes etc. In order to
monitor the investments by FIIs through these derivatives/financial instruments, the
Board decided that FIIs should report the issuance/renewal/cancellation/redemption
of these instruments to it and accordingly, and issued impugned circular dated
August 8, 2003, where the Board decided to revise the format for reporting the
issuance/renewal/cancellation/redemption of derivatives/financial instruments.
c. The report was to be submitted in two forms which were enclosed with this circular
as Annexure A and B. For the first time the reporting format included an
undertaking.
d. Here one in one time undertaken and another was bi monthly undertaken where
the FII or the sub-account, as the case may be, is required to furnish the following
undertaking:
they have to undertake that they have not issued/ subscribed/purchased any
of the offshore derivative instruments directly or indirectly to/from Indian
residents/NRIs/PIOs/OCBs.

54
Regulation 15(6) On and from the commencement of the Securities and Exchange Board
of India (Foreign Institutional Investors) (Amendment) Regulations, 2008, no sub-account shall, directly or
indirectly, issue offshore derivative instruments:
Provided that offshore derivative instruments issued directly or indirectly by a sub-account, before such
commencement and outstanding as at such commencement shall be cancelled or redeemed or closed out
before the thirty first day of March 2009
55
[2008]87SCL226(SAT)

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Issue Involve:
The primary question that raised before the tribunal is that, ”whether the Securities
and Exchange Board of India could ask the Foreign Institutional Investors (FIIs) to
furnish an undertaking that they had not dealt in respect of off-shore derivative
instruments with Indian residents, non-resident Indians (NRIs), persons of Indian
origin (PIOs) or overseas corporate bodies (OCBs) in the absence of a bar on such
deals.
Brief Facts:
The appellant furnished the some facts as been required by the respondent, which
were not according to the format as been required by the impugned circular that is
been issued by the respondent. Thus respondent was of the opinion that the appellant
has violated the provision of the FII regulation 1995. Thus call for a penalty under
sec.15HB of SEBI Act. Amounting to 1 core to be levied upon the appellant

SAT Finding: Tribunal allowed the appeal and reversed the decision given by the Board
a. Baring to deal with Indian residents/NRIs/PIOs/OCBs:
Tribunal has perused this Regulation and find that there is no prohibition on the FIIs
or their sub-accounts from dealing in ODIs with the aforesaid class of persons.
56
Regulation 15A is only restricting their dealings with such entities which are
regulated by any relevant regulatory authority in the countries of their incorporation
or establishment, subject to compliance of "know your client" requirement. The
learned senior counsel for the appellant is, therefore, right that even today there is no
bar on the FIIs or their subaccounts and this makes the requirement of furnishing the
undertaking even more incomprehensible. In this view of the matter, the Board was
not justified in asking for the undertaking prescribed by the revised reporting format.
b. Show cause notice was confusing:

56
15 A.(1) A Foreign Institutional Investor or sub-account may issue, deal in or hold, off-shore derivative
Instruments such as Participatory Notes, Equity Linked Notes or any other similar instruments against
underlying securities, listed or proposed to be listed on any stock exchange in India, only in favour of those
entities which are regulated by any relevant regulatory authority in the countries of their incorporation or
establishment, subject to compliance of "know your client" requirement: Provided that if any such instrument
has already been issued, prior to the 3rd February, 2004, to a person other than a regulated entity, contract
rd
for such transaction shall expire on maturity of the instrument or within a period of five years from the 3
February, 2004, whichever is earlier.(2) A Foreign Institutional Investor or sub-account shall ensure that no
further downstream issue or transfer of any instrument referred to in Sub-regulation (1) is made to any person
other than a regulated entity.

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 Tribunal was also not able to make out any particular offence from the show cause
notice and were unable to ascertain as to what is the precise charge which the
adjudicating officer wanted to make out.

Subsequent Amendment:
I. The amendment brought after has make it mandatory for the FIIs and Sub Account
holders in case they issue securities to any individuals it must be registered with
foreign appropriate authorities.
Comments: Still no express bar for non-issuance of the securities of securities to
Indian resident or etc.

3. In Re: Barclays Bank Plc.57(2009)

Another case where ODIs were issued by FIIs without doing proper following Proper
KYC norms
Brief Facts:
a) SEBI has asked for some information about some ODIs, where ADAG share were
kept underlie, and that are been issued to the counterparty, on receipt of the advice
applicant stated that the counter party was UBS AG, SEBI instructed the Applicant
to furnish information about the ultimate Beneficiaries of these instruments,
which the applicant was not able to furnish.
b) Than SEBI written latter to UBS asking information for the same, in between
applicant submitted an application stating that this securities are not issued to UBS
but one Hythe Securities. On receive of this communication Board asked the
applicant to provide all necessary details regarding the transaction and the ultimate
beneficiaries of these securities. Via following communication Applicant sated that
the securities were actually hold by Puri Engineering, and it was the holding this
share in the name of Hythe Securities.
c) As mandated in PN reporting system the FIIs are required to disclose who is the
ultimate beneficiaries of these securities that are hold by him. It is important here to
note that Hythe Securities was regulated by an appropriate foreign regulator, viz,

57
MANU/SB/0175/2009

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 FSA (U.K.) the puri engineering was not a regulated body thus amounted to gross
violation Regulation 15A58
Order:
1. It was found that the Applicant has violated the provision FII regulation 1995
R.15-A, further R 20 was also violated by submitted wrong information.
2. It was also clear that the Applicant was not able to follow KYC norms to the
sprite. Barclays has not only failed to provide true, fair and complete details of
the ODI activity undertaken by it but also prima facie violated the provisions of
FII Regulations by furnishing false and incorrect information to SEBI.
3. As a regulator therefore, SEBI cannot allow such an entity to continue with any
activity with regard to ODIs. After due consideration of the facts and
circumstances of this case, SEBI is of the view that Barclays needs to be
restrained in its activity in dealing with ODIs till such time as SEBI is satisfied
that Barclays can provide true, accurate and complete picture of its ODI
transactions as envisaged by the FII regulations and the reporting requirements
therein. Therefore, it is necessary, in order to protect the interest of the investors
and for the orderly development of the securities market to take preventive
measures and issue urgent directions in this regard to ensure that such kind of
violations do not continue or get repeated to the detriment of the investors.
4. Thus Barclays Bank PLC is restrained from not to issue/subscribe or otherwise
transact in any fresh/new Offshore Derivative Instrument till such time as
Barclays satisfies SEBI that it has put adequate systems, processes and controls in
place to ensure true and correct reporting of its ODI transactions to SEBI
Barclays shall furnish a certificate from an auditor of international standing to
this end.

58
Supra note 56

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SUGGESTION:
1. Qualified Foreign Investor: The need for assembling the various investor categories
are felt and also highlight in the report59. The time cannot be more appropriate than
now, when a combined effort should be taken in regulators and ministry level to
combine various Foreign investor into one. As noted in the report in India their lies
various category of foreign investor like NRIs/POI/FVCF etc , these all categories of
investor should be brought under one umbrella category viz, QFI, if it been done than
there will be no need for separate regulation governing each class, and often these
investor does have common back word linkage
2. Shareholding Pattern: As a established principle in the corporate law that the
shareholders are actual person to whom any benefit accrues and loos happen, thus it
should be made mandatory for the FIIs to disclose their, including all the sub-
accounts register with them share holding pattern, or the top five share holder has to
be disclosed
3. Details of Directors or Similar post: Directors are head and brain of any
organisation thus, how were behind the corporate veil has to be mentioned, while a
FII is registering.
4. Exchange of Information: There should be a constant flow of information among the
various markets such that there exits a paradigm of stability and market dilemmas and
crashes can be averted thereto.
60
5. Tobin tax should be implemented: It is seen as restrictive measure but under the
present unstable circumstance this tool will become very affective, it a mechanism via
which short term conversion of money is taxed. When FII invest in the market it has
to open a bank account where the conversion takes place, and in case it sales out stock
on or before a particular date or want to take away complete investment with a
specified period, than it has to convert the money back to the original currency, than
this conversion to be taxed. The tax rate can be low so that it does not become hurdle
in case of genuine conversion. But enough to deter the fly by night investors from
venturing.
6. Upgrade the KYC norms to OCED standees: UBS took advantage of the fact
which was later succinctly pointed out by SAT that the KYC norms are vague.
However KYC norms are commercial value and are capable of no definite precision.

59
Supra note 1o
60
http://en.wikipedia.org/wiki/Tobin_tax

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 However, SEBI can follow RBI’s mandate when they decided to avert financial
frauds and banks were ordered to find out the ultimate depositors and the ultimate
beneficiaries.
OECD standard of KYC requires the provision of information about each transaction
from source to completion. This includes
a) determining the identity of a foreign investor,
b) which would include corporate structures.
This would also include establishing a system of investigation to track foreign
individuals.
Understood as such, KYC norms help establish the identity of investors without
current regulatory hassles. KYC norms, as broadly understood here, also ensure that
authorities have the means to address concerns regarding proceeds from criminal
activity as well as tax and capital flows management regulations evasion and market
integrity matters. This would address concerns related to monitoring capital flows
related to drug trafficking, extortion, terrorism and money laundering as well as
phenomena such as round-tripping, also

7. The Requirement of simplification: It is a much need approach which should be

undertaken at earliest, compiling every norms for FII route should be unified and
should be made single window system, further, existing norms should converted into
a code, which gives a complete mechanism and regulatory frame work form
registering the FII to penalty and discloser into one. Thus allow the entry requirement
to be simplified and registration process should be more and more base on objective
criteria, and increase the discloser.

The law regarding FII is almost two decade old the original regulation has undergone much
change keeping the structure same. The judiciary has also able to understand the SEBI’s
concern and helped it to safe guard the interest of common investors., From UBS to Socio
general the Regulation has undergone many amendment one of the important amendment
was amendment 2008, which has tightened the regulation in various aspect from discloser to
issue of securities and other are but still some area are left un attended which needs a look
from a promoter and not from the perspective of regulator

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BIBLOGRAPGHY
1. Books:
a) SEBI Manual, TAXMAN publication 2008.
b) R.Krishnan “Commercial’s hand book on Foreign Investment in India: Law,
Practice and procedure” 4 ed. 2003.
2. Report
a) “Report of the Working Group on Foreign Investment” 30 July 2010 Department of
Economic Affairs Ministry of Finance New Delhi India.
b) RBI Master circular on Foreign Investment 2010

3. Articles:
a) M.V. Kini “An Overview of the Regulatory Environment in India with respect to
Hedge Funds”
b) Foreign Institutional Investors in India: A policy development
c) Singh M.” Use of Participatory Notes in Indian Equity Markets and Recent
Regulatory Changes”

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