The Securities and Exchange Board of India (SEBI) is one of two regulators of India's derivatives market. The other, the Forward Markets Commission (FMC) oversees futures on physical commodities where SEBI administers financial products. SEBI is an independent agency created in 1992 and is a department in the Ministry of Consumer Affairs Food and Public Distribution. As of 03 April, 2007, there were 996 Foreign Institutional Investors (FII) directly registered with SEBI. FIIs, in most cases, must receive approval from SEBI before they can commence trading in India. There are 4 ways for an FII to access the India market.
1. Direct Registration: XYZ Capital (XYZ) registers itself as a FII with SEBI. XYZ must be regulated by an overseas regulator. The FII will then pay SEBI an US$10,000 registration fee to gain a 3 year license. Depending on the track record and experience of XYZ Capital registration can take from 1 month to 1 year. Trading occurs through a local broker under XYZ's FII license. XYZ also requires an onshore local bank and custody account.
2. Sub Account: XYZ becomes a sub account (SAC) of another FII by first registering itself with SEBI. The registration fee payable to SEBI is US$ 2,000. The license is valid as long as the FII's SEBI account where XYZ holds its sub account is valid. Trading in the name of SAC occurs through a local broker and an onshore bank and custody account must be opened.
3. Mauritius: XYZ acquires an FII registration under the main Master fund. XYZ registers a 100% subsidiary in Mauritius (XYZM) which becomes the sub account of XYZ. Trading is carried out through a local broker in the name of XYZM. The additional cost of setting up a Mauritius entity and annual audit, director fees, etc. must be considered. Trading occurs through a local broker under XYZ's FII license. XYZ also requires an onshore local bank and custody account. According to the Double Taxation Avoidance Act (DTAA)between India and Mauritius, Capital Gains arising from sale of shares is taxable in the country of residence of the shareholder and not in the country of residence of the Company whose shares have been sold. Therefore, a Company resident in Mauritius selling shares of Indian Company will not pay tax in India. Since there is no Capital Gains tax in Mauritius it will escape tax altogether.is restricted by position limits and inventory. However, there is no need to deal with a local broker, no capital gains tax, no local bank or custody accounts and no extra set up time and cost. SEBI has cleared Short selling by institutions and will initially be restricted to 159 stocks in which derivatives trading is allowed.
4. Offshore Access: XYZ approaches an offshore investment bank and accesses India indirectly though offshore products such as Total Return Swaps. Using an over-the-counter instrument known as a participatory note or PN, a FII takes a position in the Indian market, then issues a PN with the same nominal value to XYZ. Of course the transaction costs are twice as much to XYZ and the FII
