SEBI bars FPIs from issuing ODIs with derivatives as underlying: Key highlights from circular

The Securities and Exchange Board of India (SEBI) has introduced stricter regulations for foreign portfolio investors (FPIs) on offshore derivative instruments (ODIs). ODIs are vehicles that allow foreign investors to invest in Indian equities or equity derivatives without registering in the country. In a circular issued on Tuesday, December 17, the capital markets regulator announced that FPIs can no longer issue ODIs with derivatives as underlying or use derivatives to hedge their ODI positions on Indian stock exchanges.

Here are the new SEBI Guidelines on ODIs

1. ODIs to be backed by securities only:

• ODIs can now have only securities (excluding derivatives) as the underlying assets.
• These ODIs must be fully hedged on a one-to-one basis using the same securities throughout their tenure.

2. Separate FPI registration for ODI issuance:

• FPIs issuing ODIs must register separately under a dedicated FPI category, with the name suffixed by “ODI” under the same PAN.
• This separate registration rule does not apply to ODIs with government securities as the underlying assets.

Disclosure mandate for ODI subscribers

SEBI has also tightened disclosure requirements for ODI subscribers with large or concentrated holdings in the Indian markets. ODI issuers are required to report detailed information on entities holding ownership, economic interest, or control in ODIs if they meet the following conditions:1. High exposure to a single corporate group:

ODI subscribers holding more than 50% of their equity ODI positions in securities of a single Indian corporate group.

2. Large market exposure:

ODI subscribers with equity positions exceeding ₹25,000 crore in the Indian markets.

What does SEBI aim to achieve?

SEBI’s new measures aim to address regulatory arbitrage and enhance transparency in the ODI market. By implementing tighter controls, the regulator seeks to bring parity in the treatment of ODIs and segregated FPI portfolios while safeguarding the Indian financial markets.