Sebi prohibits FPIs from issuing P-notes with derivatives as an underlying asset
Dec 18, 2024
Synopsis
Additionally, the regulator prohibited overseas funds from hedging ODIs with derivative positions on Indian stock exchanges. Furthermore, Sebi asked foreign portfolio investors issuing ODIs to obtain ownership information of all the investors holding such instruments.
The Securities and Exchange Board of India (Sebi) Tuesday barred foreign portfolio investors from issuing offshore derivative instruments (ODIs), locally referred to as participatory or P-notes, with derivatives as an underlying asset.
Additionally, the regulator prohibited overseas funds from hedging ODIs with derivative positions on Indian stock exchanges. Furthermore, Sebi asked foreign portfolio investors (FPI) issuing ODIs to obtain ownership information of all the investors holding such instruments.
ODIs with derivatives as underlying/reference, issued and outstanding as on the date of this Circular, shall be permitted to be redeemed within a period of 1 year from the date of this circular. However, no renewal of such ODIs shall be permitted, Sebi said on Tuesday.
“A foreign portfolio investor shall not issue ODIs with derivatives as reference/underlying….A foreign portfolio investor shall not hedge their ODIs with derivative positions on stock exchanges in India,” read the Sebi circular published late Tuesday. “Accordingly, ODIs shall only have securities (other than derivatives) as underlying and shall be fully hedged with the same securities on a one-to-one basis, throughout the tenure of the ODI.”
P-notes are derivative instruments of Indian-listed financial assets and issued by registered FPIs to their overseas clients, enabling them to trade in Indian stocks without having to register with Sebi.
At the end of July, the latest period for which relevant market data is available, the value of outstanding ODIs stood at Rs 1.58 lakh crore, translating into less than 2% of the total assets under the custody of FPIs registered in India. FPIs collectively held 17.6% ownership in all NSE-listed companies as of September 30.
“There will now be a complete restriction on issuance of ODIs with derivatives as underlying, which means that investment in derivatives cannot be made even for hedging purposes,” said Rajesh H Gandhi, partner, Deloitte.
The regulator said FPIs can issue ODIs only through a separate dedicated registration with no proprietary investments. Such FPI registration should be in the name of the FPI with “ODI” as suffix under the same PAN, it said.
G-secs exempted
To be sure, this rule excludes ODIs that have government securities as their underlying.
Sebi has mandated additional disclosure requirements on ODI subscribers with more than 50% of their equity ODI positions through an FPI in ODIs referenced to the securities of a single Indian corporate group. Stricter disclosure norms will now also apply to those entities with equity positions exceeding Rs 25,000 crore in the Indian markets.
“Also, the clarification on the threshold of 50% investment in a single corporate group and the limit of Rs 25,000 crore beyond which granular details are required to be provided now applies at the ODI subscriber level, along with relevant exemptions, rather than the ODI issuer level,” Gandhi said.
However, entities such as government and government-related investors registered as FPIs, Public Retail Funds, and Exchange Traded Funds (ETFs) with less than 50% exposure to Indian equity markets have been exempted from these additional disclosures.
[The Economic Times]
