Suspecting illicit insider trading and market manipulation through misuse of the controversial 'participatory note' route, Sebi is probing a possible nexus between promoters of listed companies, investment bankers and foreign funds for such activities.
The probe follows several instances of listed company shares being possibly manipulated through concerted efforts of their promoters and market intermediaries such as investment banks and foreign funds during share sales.
Those under scanner include funds operating from the financial centres of Mauritius, Singapore and Hong Kong, while the role of some major financial institutions from the US, Europe and within India are also being examined, a senior official said.
Sebi is currently in the process of seeking details from these banks and the listed companies concerned and some of these entities have promised full cooperation in the matter.
The probe so far has suggested that foreign funds, including well-known hedge funds that recently expanded their exposure to Indian markets, could have abused a lacuna in the disclosure-based regulatory regime to make illicit gains.
In many cases, trades were done through offshore derivative instruments, commonly known as P-Notes.
Sebi has tightened P-Note norms after coming across instances of misuse and has made it mandatory for registered FIIs issuing them to collect details of the real beneficiary owners of funds to be invested through this route.
P-Notes are instruments issued by registered FIIs to overseas investors such as high net worth individuals and hedge funds who wish to invest in the Indian markets without directly registering themselves with Sebi. Earlier, it used to be difficult to establish the real identity of the P-Note holders on whose behalf FIIs traded in India.
While FIIs are obliged to identify the real beneficiary owners of funds used by P-Note holders, its disclosure-based regime results in a time lag and Sebi gets to the end of the money trail only after conducting an enquiry.
There are no plans to revise P-Note rules as the current framework was prepared to improve ease of investing by foreign entities. Sebi is confident that its strong surveillance mechanism and cooperation by registered market intermediaries would help it effectively crack down on the manipulators.
Investments through P-Notes surged to Rs 2.12 lakh crore as on May 31, the highest level in the past six years.
Sebi is also counting on help from foreign peers in its widened probe into these suspected cases of manipulation.