The Securities and Exchange Board of India has banned Socit Gnrale (SG) from issuing participatory notes for failing to have “true, fair and complete details on trades.
The move by the Indian financial regulator comes a month after Barclays was banned from trading offshore derivatives instruments (ODI) following its failure to provide “true and accurate picture of transactions” to Indian regulators.
Participatory notes (PN) are a form of derivative that allow foreign investors not registered by the SEBI to invest in Indian securities.
At the centre of both the SG and Barclays case lies Hythe Securities. a UK broker and wealth manager.
According to the Order issued by SEBI: From the reports submitted by Socit Gnrale, during the period January 2006 and January 2008, it was observed that SG had issued certain ODIs/PNs to Hythe Securities Limited, with Reliance Communications Limited as the underlying.
After demanding more information from SG about the nature of the transaction, SG replied that a number of trades with Hythe were wrongly reported, and that SG did not know if Hythe was the sole beneficial owner.
“Socit Gnrale has failed in its due diligence expected in the observance of the know-your-client norms, said Sebi.
In both the SG and the Barclays case, Reliance Communications was the underlying for trades with Hythe. In the Barclays case, SEBI highlighted participatory notes trades (a type of ODI) with UBS during the period between January 2006 and January 2008, and asked for full documentation concerning the trades with Reliance Communications as the underlying for the period beginning November 2003 up to October 2009. Barclays then notified the regulators that not only were a number of trades with UBS undisclosed to the regulators, but there were a number of discrepancies with the trades.
Barclays told SEBI that the trades were not to UBS after all, but to Hythe Securities, a UK broker and wealth manager, an entirely new entity unknown to SEBI from previous Barclays reports.
More on the Barclays case here