The Securities and Exchange Board of India (SEBI) has barred foreign portfolio investors (FPIs) from issuing offshore derivative instruments (ODIs) with derivatives as underlying assets or using derivatives to hedge their ODIs in India in bid to curb regulatory arbitrage .
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“A foreign portfolio investor shall not hedge their ODIs with derivative positions on stock exchanges in India…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,” SEBI said in a circular on Tuesday.
Further, FPIs can issue ODIs only through a separate dedicated FPI registration with no proprietary investments, effective immediately. Such FPI registration will be in the name of the FPI with ‘ODI’ as suffix under the same PAN.
The ODIs that are already issued and outstanding with derivatives as underlying can be redeemed within 1 year, with no renewal of such ODIs. FPIs that have outstanding ODIs will have to obtain a separate registration within 1 year.
The regulator has also mandated granular details of entities holding any ownership, economic interest, or exercising control in the ODI subscriber having more than 50% of its equity ODI positions in securities of a single corporate group or having equity positions worth more than Rs 25,000 crore. This rule will take effect after five months.
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Government investors registered under FPI regulations, public retail funds, exchange traded funds (with less than 50% exposure to India and India-related equity securities) and entities listed on specified exchanges as permissible, among others, are exempt from these additional disclosures.
Further, a standard operating procedure (SOP) will be issued within 2 months outlining the process for validating disclosures and exemptions. Depositories have to put appropriate systems, procedures, and mechanisms in place within five months on the circular.
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