New Delhi, July 7, 2017

Continuing to tighten norms for participatory notes, markets regulator Sebi today came out with guidelines for issuance of such instruments where the underlying assets are derivatives.

"The ODI issuing FPIs shall not be allowed to issue ODIs with derivative as underlying, with the exception of those derivative positions that are taken by the ODI-issuing FPI for hedging the equity shares held by it, on a one to one basis," Securities and Exchange Board of India (Sebi) said in a circular.

The regulator has also clarified on existing ODIs (Offshore Derivative Instruments), also known as participatory notes, where the underlying assets are derivatives.

In such cases, where the underlying derivatives position are not for purpose of hedging the equity shares, the issuing FPI (Foreign Portfolio Investor) has to liquidate such ODIs latest by the date of maturity or by December 31, 2020, whichever is earlier.

Sebi also advised ODI-issuing FPIs to liquidate such ODI instruments prior to the timeline.

In the case of issuance of fresh ODIs with derivatives as underlying, Sebi said a certificate has to be issued by the compliance officer (or equivalent) of the ODI-issuing FPI.

It should be certified that the derivatives position, on which the ODI is being issued, is only for hedging the equity shares held by it, on a one-to-one basis.

"The said certificate shall be submitted along with the monthly ODI reports," the regulator added.

As per Sebi, the term "hedging of equity shares" means taking a one-to-one position in only those derivatives which have the same underlying as the equity share.

Last month, Sebi tightened P-Note norms by levying a fee of USD 1,000 on each instrument and barred their issuance for speculative purposes to check any misuse for channelising black money.
At the same time, the regulator also decided to relax the entry norms for foreign portfolio investors willing to invest directly in Indian markets rather than through participatory notes.

[The Times of India]