The finance ministry has rejected the demand of foreign institutional investors to further ease norms for two-way fungibility between American depository receipts and their counterpart domestic shares.

Several FIIs had presented a strong case to the Securities and Exchange Board of India and the finance ministry to do away with the role of custodian and also to remove the ceiling on fungibility based on the foreign direct investment caps in some sectors.

The ministry is of the view that such procedural relaxation will not help domestic investors.

Its stand has been supported by the divestment ministry, which feels that the object of the current divestment exercise is to generate value for Indian retail investors.

While lowering the barrier between local and foreign markets further will help institutional investors to realise better value for their investments, the supply of good securities for retail investors will not increase.

The issue had cropped up in the context of the renewed emphasis on divestment of public sector companies, including offloading residual shares of some of the already divested ones in the stock market.

As per current rules, the transfer of shares of a domestic company between local and overseas markets ha to be routed through a custodian, usually a bank.

The custodian is responsible for ensuring that sectoral caps are not breached.

FIIs also have to report the details of such conversions to the Reserve Bank of India and Sebi.

Based on the presentation made by the FIIs, Sebi has moved a concept paper on the subject of doing away with the custodian.

In the past two years, the center substantially relaxed rules for conversion of shares and vice versa.

These included extending the scope of fungibility, provided there was no breach of sectoral caps on foreign direct investment.

It has also allowed companies to buy blocks of shares from domestic markets and convert them to depository receipts abroad.