The Securities and Exchange Board of India has sought the government's advice on the creation of a contrarian fund to counter the rising inflow of foreign institutional investor funds.

The regulator has also sought the government's advice on addressing four more market imperfections, including the absence of large institutional players, dispersed regulation of listed companies, and dispersed measures for investor education.

Sebi has suggested that participation of banks, pension funds and insurers will help in capacity building.

It has pointed out that mutual funds hold 76 per cent of their funds in debt and money market instruments. Just under a quarter of their funds are invested in equities.

FII investment in India
Year	Amount in Rs crore
1992-1993	13
1993-1994	5126
1994-1995	4796
1995-1996	6942
1996-1997	8574
1997-1998	5957
1998-1999	1,584*
1999-2000	10122
2000-2001	9934
2001-2002	8755
2002-2003	2689
Current fiscal up to Nov 29	28916
Cumulative	87866
(US$ 21.31 billion) *Net FII outflow

The regulator has said the capital market can be deepened through new issues, including divestment of the government's stake in public sector undertakings.

Besides, exchange trading of government securities and fixed-income derivatives by banks and financial institutions can impart more depth to the market, it has pointed out.

Sebi has also cited the recommendations of the joint parliamentary committee on the stocks scam of 2001 to demand comprehensive regulatory powers over listed companies.

At present, the powers are divided between the department of company affairs and Sebi. The Investor Education and Protection Fund, currently under the jurisdiction of the department of company affairs, might also be transferred to Sebi, it said.

The regulator is reviewing the policy on participatory notes and sub-accounts. It recently directed foreign institutional investors to report the issue of participatory notes after it was highlighted that almost 25 per cent of the foreign fund inflow till October-end this year -- about Rs 23,000 crore (Rs 230 billion) -- was invested in the market through participatory notes.