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Meet to discuss curbs on investment arms today

Shaji Vikraman

Hema Ramakrishnan

NEW DELHI, Aug. 15

THE Government is to take up the issue of regulating investment firms or non-banking financial companies (NBFCs) floated by corporate houses, at the meeting of the high-level committee on capital markets (HLC) headed by the Governor of the Reserve Bank o f India, Dr Bimal Jalan.

Policing the activities of overseas corporate bodies (OCBs) is also slated for discussion by the committee which is meeting on Thursday in Mumbai, according to officials here. Besides the RBI Governor, the Finance Secretary, the Chairman of the Securitie s and Exchange Board of India (SEBI) and Chairman of the Insurance Regulatory Development Authority (IRDA) are members of the committee.

The sense of urgency being shown to rein in NBFCs promoted by some leading corporates, has been attributed to the probe by the Joint Parliamentary Committee (JPC). The JPC had sought SEBI's opinion on the widespread practice of companies using their subs idiaries to ramp up the price of their shares.

The capital markets' regulator, in turn, has made out a strong case for putting the brakes on such investment firms. SEBI had told the JPC that these companies need to be regulated as its preliminary investigation report on the March 2001 price manipulat ion had established links between some of the corporate groups and their investment firms.

According to the SEBI report, substantial funds were routed to stock brokers from promoter group companies. These funds were reckoned to be used for building large concentrated positions in certain select scrips. ``Receiving such huge funds for carrying out such large stock market activities point towards a close nexus between promoter group companies and brokers in market manipulative activities,'' the report said.

In SEBI's report, there is a mention of funds being routed through a Zee group company, Digital Super Highway Pvt Ltd, and a finance company of the HFCL group -- Burlington Finance. SEBI was of the view that the provisions of Section (77) of the Companie s Act seems to have been violated by HFCL and Zee Telefilms. This section deals with the restrictions on purchase by company, or loans by company for purchase, of its own or holding company's shares.

The onus of regulating the NBFCs falls on the RBI while the Department of Company Affairs (DCA) has the mandate to regulate the investment activities of companies and their investment firms.

SEBI had also pointedly referred to the role of some OCBs in market manipulation in association with entities of stock broker, Mr Ketan Parekh, who is now in judicial custody. Some of the OCBs which had a capital base as low as $5 and $5,500 had taken ou t money aggregating over a couple of hundred crores rupees.

The OCB and foreign institutional investors (FII) sub-account route was misused, according to the regulator as it provided channels for repatriation of profits based on manipulated prices and possible siphoning of money out of India.

It is against the background of the recent stock scam and the JPC probe that the HLC is taking a look at the regulation of investment firms and OCBs.

Operationalising of the scheme announced in this year's budget for two-way fungibility of American depository receipts (ADRs) or global depository receipts (GDRs) also figures on the agenda of the HLC. The idea is to allow underlying shares of Indian com panies which have been converted into local shares after a ADR or GDR offering to be reconverted into ADRs or GDRs.