MUMBAI: Market regulator Securities and Exchange Board of India (SEBI) on Wednesday expressed its displeasure about overseas stock lending operations by foreign institutional investors (FIIs) to a select group representing these institutions.

Financial Services Group, a Hong Kong-based club of FII representatives, had gone to meet top SEBI officials after the regulator recently warned FIIs on participatory note (P-Note )-based lending and borrowing operations and the related short selling.

In the meeting, sources said, the key message from CB Bhave, chairman, SEBI was that FIIs should not facilitate lending and borrowing operations based on Indian shares in jurisdictions not under SEBI.

Top officials from Citigroup, Merrill Lynch, Lehman Brothers, CLSA, JP Morgan, Morgan Stanley and a few other top FIIs attended the meeting, sources said.

Of late, it has come out in the open that FIIs were indulging in PNote related lending operations which were being used for short selling in the market. Recently released data showed that in just six sessions—between October 10 and October 17—over Rs 1,000 crore worth of stocks were short sold using the P-Note route.

Late last week, SEBI had also written to all FIIs that by Thursday they should submit data on their outstanding positions on securities lent abroad. “In order to take stock of the existing position, you are also requested to submit the existing/outstanding positions of the securities lent abroad as on October 09, 2008,” noted an email, from SEBI’s division of foreign institutional investors and custodians to foreign funds. “Please submit the required information by October 23, 2008,” the email added.

Market players are however skeptical if SEBI will go ahead and publish the full data. “If in six sessions, and that too at such low index levels, FIIs had lent stocks worth over Rs 1,000 crore, what could be the extent of their outstanding positions is anybody’s guess,” said a top official at a local brokerage. “I feel the full data could unnerve investors and so will not be published,” the broking house official added.

In the backdrop of recently published data on overseas lending by FIIs, there has been increasing demand for a ban on short selling by these institutions, something similar to the recently imposed short selling bans by US, USA and several other countries. SEBI had also warned FIIs that if the same continued, it would take strict action against such trades.

source: Economictimes

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