Measures to address regulatory arbitrage with respect to Offshore Derivative Instruments (ODIs) and FPIs with segregated portfolios vis-à-vis FPIs
Summary
This circular modifies the FPI Master Circular to impose stricter requirements on Offshore Derivative Instruments (ODIs) and segregated portfolios. It mandates that ODIs be issued through separate dedicated FPI registrations without proprietary investments and prohibits hedging with Indian derivatives. Additionally, it introduces granular disclosure obligations for ODI subscribers meeting specific ownership or investment thresholds. This section mandates daily tracking of the 3% limit for apex companies and requires realignment or disclosure within specific timelines if concentration thresholds are breached. It outlines modifications to FPI regulations regarding investor group holdings, segregated portfolios, and exemption criteria based on equity AUM levels. Finally, it establishes transitory measures for existing ODI positions and registration requirements, with phased implementation dates. Paragraph 4 mandates that Standard Operating Procedures be framed and made public within two months of the Circular's date. Paragraph 5 requires depositories to implement compliance systems within five months from the same date. Paragraph 6 cites the legal authority under the SEBI Act and FPI
Text
A Foreign Portfolio Investor shall issue ODIs only through a separate dedicated FPI registration with no proprietary investments. Such FPI registration shall be in the name of the FPI with “ODI” as suffix under the same PAN.
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. 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.
Granular details of all entities holding any ownership, economic interest, or exercising control in the ODI subscriber, on a full look through basis, up to the level of all natural persons, without any threshold, shall be collected by ODI issuing FPI from its ODI subscribers... and submitted to the Depositories.
The detailed mechanism for independently validating conformance of the ODI subscribers with the conditions, exemptions and format for disclosures shall be spelt out in the Standard Operating Procedure (SOP) framed and adopted by Depositories, DDPs/Custodians and ODI issuing FPIs in consultation with SEBI.
ODI subscribers satisfying any of the criteria listed below shall not be required to make the disclosures as specified in Para (i) above: a) Government and Government related investors... b) Public Retail Funds... c) Exchange Traded Funds... d) Pooled investment vehicles... e) ODI subscribers unable to liquidate due to statutory restrictions... f) University Funds...
ODI subscribers shall be exempted from making the additional disclosures if any of the entities referred in Para (i)(b) above qualifies for exemption and the net equity positions of remaining entities referred in Para (i)(b), after deducting the positions of such exempted entities, falls below INR 25,000 crore.
Where the entity identified on a look through basis in terms of Para (i) above, satisfies any of the criteria listed in Para (iii) above, further identification of entities having ownership interest, economic interest, or control rights of such an entity on look through basis, shall not be required.
ODI subscriber having more than 50% of its equity ODI positions in ODIs referenced to securities of a single Indian corporate group shall not be required to make the additional disclosures... subject to compliance with all of the following conditions: a) The apex company... has no identified promoter. b) The ODI subscriber does not have more than 50%... after disregarding positions in the apex company. c) The composite positions... is less than 3% of the total equity share capital of the apex company.
ODI issuing FPIs and Depositories shall track the utilisation of this 3% limit for apex companies... When the 3% limit is met or breached, Depositories shall make this information public before start of trading on the next day.
ODI subscribers shall be required to either realign their positions below the 50% threshold within 10 trading days or make additional disclosures... Provided no such requirement... shall be applicable unless the 3% cumulative limit for the apex company continues to be met through the said 10 trading days.
ODI subscribers meeting criteria specified at Para (i) (a): 10 trading days from the date of breach... Such ODI subscribers shall not be permitted to take fresh positions... during the next 30 calendar days... A list... shall be made public by the Depositories and ODI issuing FPIs shall ensure compliance.
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Source: SecMarx — Measures to address regulatory arbitrage with respect to Offshore Derivative Instruments (ODIs) and FPIs with segregated portfolios vis-à-vis FPIs. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.