The ministry of finance has called for a meeting of Reserve Bank of India and the Securities & Exchange Board of India later this week for a discussion on the revised stock lending and borrowing scheme for foreign institutional investors.
While the market regulator has suggested reintroduction of the scheme for institutional investors, the RBI expressed some legal hassles in it.
According to the view put forward by the RBI, the FIIs are required to bring in funds from their parent country and invest in the Indian markets. They are not allowed to leverage or borrow funds in India for investments.
However, under the stock lending and borrowing scheme, FIIs could lend shares and borrow money. This way, they could leverage their positions and get funds which will be much higher than the actual funds brought in by them . Therefore the scheme is not permissible under the existing laws for the institutional investors.
Earlier, in its view on allowing short selling in equity markets to institutional investors, the RBI had categorically stated that monitoring of sectoral limits of foreign investment will become a problem as all sectors are not open to 100 per cent FDI.
Short selling -- the sale of security that the seller does not own at the time of trade, is usually permitted to provide liquidity and help price discovery.
It had further informed Sebi that even if it intends to allow institutional investors in short selling, the permission should be restricted to shares in those sectors where foreign investment is allowed up to 100 per cent including limits under foreign direct investment and foreign institutional investment route.
This is because, if it is allowed in sectors which do not have 100 per cent FDI, FIIs, while buying shares for delivery and settlement of the trade, might trip on the limit. There is no mechanism to monitor this limit on daily basis in the secondary market trades.
Do you want to discuss stock tips? Do you know a hot one? Join the Stock Market Investments Discussion Group
