Financial regulators are compiling a list of tax havens to make it impossible for financial entities to get the coveted FII status in India. The RBI and Sebi are being asked to prepare a negative list of tax havens, the finance ministry told the Economic Editors conference on Tuesday. This is expected to make it easier for genuine hedge funds to be registered here, as the government is also trying to plug loopholes in the various double taxation avoidance treaties with some of the tax havens like Mauritius to prevent their misuse.

The government has also made clear its comfort level with the prevalence of Participatory Notes (PN) in the stock markets. The ministry has said it will not press for changes in the Sebi (FII) guidelines to give the regulator more powers to ask for details of PN holders. The data on PNs does not show any substantial increase in the value of PN as a proportion of total FII investment. So there is no concern of their disproportionate influence on market behaviour, the note said.

The comments by the ministry on the major recommendations of the Ashok Lahiri report on FII flows shows it is keen to push for a well-regulated stock market that actively encourages the flow of good quality capital from abroad.

But as a note of caution, the government will study the global regulatory experience on hedge funds, before a policy on hedge funds is finalised.

Meanwhile, the current practice of limiting an FIIs exposure to 10% of a companys equity will continue, said the finance ministry. Domestic financial sector regulators, RBI and Sebi, have to apply the common beneficial ownership criteria to restrict individual investment limit in case of FIIs and sub-accounts, the ministry note said.

The expert group under the chairmanship of Ashok Lahiri, chief economic advisor in the finance ministry, had favoured an investment limit of 10% on an FII, including its sub-accounts. But it had added the caveat that the requirement may be phased over a five-year period.

However, the government may further liberalise the debt flows for FIIs. The government has also advised Sebi to continue with the present practice of not permitting high net worth individuals to be registered as sub-accounts. This is in line with the regulatory concerns expressed by the Lahiri panel.