Sebi worried about FDI through secondary market route

Excerpts from Power Breakfast on CNBC-TV18 Watch the full show » RELATED NEWS Technocraft files for IPO Concern on takeovers of listed cos by foreign funds: Sebi Disgorgement is Sebi's answer to financial fraud IPO scam: Sebi slaps disgorgement order on NSDL, CDSL, DPs Nifty BSE | NSE 25/05/12 Are Mutual Funds betting on Nifty?

Market regulator Sebi is worried about foreign funds using the secondary market route to take over Indian companies. It has written to the Finance Ministry, expressing this concern. CNBC-TV18 has more details.

 

The Finance Ministry is grappling with a new problem - FDI through the secondary market route. Sources in the Finance Ministry say that recent cases of foreign funds, which include both private equity, and broad base funds, picking up substantial stakes in Indian companies, can be a cause of worry. This because the source of funds are unverifiable.

 

A letter written by market regulator Sebi corroborates these concerns. Sebi had written saying the buyers are companies based in Mauritius with very low capital base, and on the face of it, just front companies. The funds, for the purpose of such takeovers, flow in via the foreign funds or PE fund route.

 

The Finance Ministry is worried that a similar situation could arise which could lead to asset stripping of cash rich Indian companies and thereby affect shareholder value.

 

Sources say the Finance Ministry has sought clarifications from the RBI under FEMA. SEBI has also said that there is no scrutiny of such takeovers by the Foreign Investment Promotion Board (FIPB) since foreign investment norms were liberalised earlier this year.

 

While the Reserve Bank of India looks at pricing of shares in such takeovers, Sebi's concern, by its own admission, is limited to compliance with the Substantial Acquisition of Shares & Takeovers (SAST) Regulations of 1997.

 

According to Press Note 4, there is no need for FIPB's approval in the case of foreign investment which is subject to clearances by RBI or Sebi. In other words, such investments are on the 'automatic route' for foreign direct investment.