The Securities and Exchange Board of India has asked the Reserve Bank of India "for necessary action at their end", in connection with a Mauritius-based overseas corporate body subscribing to participatory notes issued by Citigroup and Goldman Sachs.

Indeed, Sebi has initiated adjudication proceedings against Citigroup "for not disclosing the details of PNs up to July 2003".

Under the scanner

Sebi finds Goldman Sachs and Citigroup had issued PNs to an OCB Even barred entity CSFB found to be dealing in Indian PNs Regulator finds there were at least 3 levels of investors Able to track down first layer only Inquiries under way to unearth final beneficiaries

PNs are essentially offshore derivative instruments issued against underlying Indian securities. OCBs are banned from participating in the Indian equities market in any way.

Based on the PN data it recently received from foreign institutional investors and their sub-account holders operating in India, Sebi has unearthed around 31 entities "appearing to be OCBs having subscribed to the PNs issued" by some of the FIIs or sub-accounts.

The details of these have also been forwarded to the RBI for verification and action.

However, the RBI does not have jurisdiction over Goldman Sachs or Credit Suisse First Boston, to which PNs were issued.

A Citigroup spokesperson said, "Based on Sebi's request, Citigroup Global Markets, London, has provided additional information on specific counterparties as per requests received."

With reference to providing details on PNs since July 2003, the spokesperson said: "CGM, London, has responded to adjudication proceedings initiated in response to prior reportings. The reportings have since been regularised." Contacted in Hong Kong, Edward Naylor, spokesman for Goldman Sachs, said, "We do not comment on regulatory issues."

According to information gathered by Sebi, six FII/sub-accounts have been dealing with these 31 entities. These are: Goldman Sachs Investment (Mauritius) Ltd, Swiss Finance Corporation (Mauritius) Ltd, CGM (Mauritius) Ltd, Morgan Stanley Dean Witter Mauritius Ltd (sub-account), Merrill Lynch and Copthall Mauritius Investment Ltd.

Sebi's analysis of the FII accounts shows that "there were several layers of investors in these offshore derivative instruments".

The levels varied from one FII sub-account to another, and "there were a minimum of three layers of investors".

Many of the FIIs were not willing to give details beyond the first layer of investors, Sebi realised.

The market regulator is, however, pursuing it further and four identified entities have furnished a little more information up to the next layer.

According to data available with Sebi up to the end of September 2003, a dozen FIIs or sub-accounts issued offshore derivative instruments.

The net investment of these 12 entities was Rs 15,133 crore (Rs 151.33 billion) while the value of the PNs outstanding was about Rs 15,528 crore (Rs 155.28 billion).

These investments constituted around 20 per cent of total net FII investments till October 13, 2003. The remaining 80 per cent was direct investment from FIIs/sub-accounts.

Proceeding further, Sebi sought information from Goldman Sachs and Citigroup about the PNs and warrants issued by them to OCBs and investment banker CSFB.

Apart from OCBs being banned, CSFB also has been barred from participating in the Indian securities market in any way. Last year, its application for renewal of registration as an FII was rejected.

Sebi sent a copy of its analysis to the finance ministry. Business Standard has obtained a copy of portions of the analysis.

Sebi's investigations revealed that Goldman Sachs had issued PNs/warrants to Credit Suisse First Boston, Switzerland.

The outstandings were to the tune of Rs 579 crore (Rs 5.79 billion) in September 2003, against Sensex stocks. It has now asked Goldman Sachs to furnish further details of the underlying investors and the funds flow.

In recent weeks, Sebi has been busy trying to pierce the veil and discover the true identities of investors in PNs.

By the end of September 2003, it had been unable to go beyond the first layer of investors participating in PNs.

With FIIs pleading client confidentiality as the reason for not parting with information on investors, Sebi amended its FII regulations in August to make all FIIs and their sub-account holders furnish information on offshore derivative instruments like PNs based on underlying Indian securities.

But Sebi would like FIIs to disclose names for periods before that as well.

The maximum concentration of offshore derivative investments did not exceed 20 per cent for any FII. And the top 10 FII purchases constituted about 86 per cent of total FII investments during September 2003 and about 66 per cent in October 2003.