The Securities and Exchange Board of India and the Reserve Bank of India have jointly started scrutiny of large scale portfolio investments by the foreign institutional investors in the recent past.

The move follows the banking regulator's suspicion that certain market participants are misusing the FII sub-account route to channel overseas money into the local markets, after the overseas corporate bodies were banned from investing in the Indian capital market through the portfolio investment route in November 2001. RBI and Sebi officials said the examination was a "routine exercise."

The OCBs were banned from making fresh purchases in the local markets after they were indicted by the joint parliamentary committee which found instances of misuse by certain brokers.

Although examining market data is a routine activity, but under the present circumstances the joint operation assumes significance on two counts: The RBI has capped the interest rate on non-resident external deposits with the objective of cutting down the arbitrage opportunity between Indian and overseas markets.

The regulators' worries are compounded by the fact that the unrelenting stock market rally over the last three months has seen share prices of even non-descript companies going up several fold. Market participants fear operators are back in action through the FII sub-account route.

The fear is that when these operators decide to dump these stocks, many small, unsuspecting investors may be left high and dry, analysts said.

Under the current regulations, FIIs can allow corporate and high net worth individuals to avail of the benefits available to FIIs by coming in as registered sub account holders. Thus, a number of proprietary funds have been registered through the FII sub-account route.