The recent tightening of rules by SEBI regarding the issuance of offshore derivative instruments (ODIs) by foreign portfolio investors (FPIs) is a significant development in the Indian financial market. These new regulations, aimed at increasing transparency and reducing systemic risks, will have a profound impact on the way FPIs operate in India.
One of the key changes introduced by SEBI is the prohibition of ODIs with derivatives as underlying securities. This means that FPIs can no longer hedge their ODIs with derivative positions on Indian stock exchanges. Instead, ODIs will only be allowed to have securities (other than derivatives) as underlying assets, and these securities must be fully hedged on a one-to-one basis throughout the tenure of the ODI.
Additionally, FPIs will now be required to issue ODIs through a separate dedicated FPI registration, with no proprietary investments. This move is intended to streamline the process and ensure better compliance with regulatory requirements. Furthermore, ODI subscribers with significant exposure to Indian corporate groups or with large equity positions in the Indian market will be subject to additional disclosure requirements.
The new rules are expected to enhance market integrity, attract long-term institutional investors, and promote greater stability in the equity market. While these regulations may pose challenges for FPIs in terms of compliance and flexibility, they are ultimately meant to create a more resilient and transparent investment environment in India.
In conclusion, SEBI’s recent reforms in the ODI market are a step in the right direction towards ensuring a level playing field for all market participants and strengthening the regulatory framework for foreign investments in India. These changes are likely to have a positive impact on the overall stability and transparency of the Indian financial market.
