SEBI Tightens Regulations On Offshore Derivative Instruments And Segregated Portfolios Of Foreign Portfolio Investors (FPIs)

Posted On - 28 January, 2025 • By - King Stubb & Kasiva

On December 17, 2024, the Securities and Exchange Board of India (“SEBI”) has recently issued a circular outlining stricter regulations for Offshore Derivative Instruments (“ODIs”) and Foreign Portfolio Investors (“FPIs”) with segregated portfolios.[1]

Overview

SEBI introduced the following reforms designed to enhance the oversight of offshore derivative transactions in Indian capital markets and address potential regulatory loopholes:

Revised ODI Regulations

The circular strengthens disclosure obligations for ODI subscribers as FPIs issuing ODIs are now required to collect and provide detailed information about all entities holding ownership, economic interest, or control over an ODI subscriber. This disclosure must trace ownership back to the ultimate natural persons. These requirements apply to subscribers meeting specific criteria, such as holding significant equity positions in a single Indian corporate group or substantial stakes in the Indian market overall.

Furthermore, certain categories of subscribers, including government-related entities, public retail funds, and some exchange-traded funds, are exempt from these enhanced disclosure requirements.

The circular also introduces limits on how much equity exposure an ODI subscriber can have in a single corporate group. If a subscriber exceeds these limits, they must either adjust their holdings within a specified timeframe or comply with the detailed disclosure rules.

Stricter Disclosure Requirements for ODI Subscribers

To ensure greater accountability, the circular mandates that FPIs issuing ODIs collect detailed disclosures from subscribers who meet specific criteria. This includes obtaining granular information about all entities with ownership, economic interest, or control over the ODI subscriber, tracing up to the ultimate natural persons.

These disclosure requirements are particularly applicable to subscribers with significant equity ODI positions in a single Indian corporate group or those with substantial equity holdings in Indian markets.

Exemptions are provided for certain categories of subscribers, such as government entities, public retail funds, and specific exchange-traded funds. Additionally, the circular imposes concentration limits on equity ODI positions within a single Indian corporate group. Subscribers exceeding these limits must either realign their positions within prescribed timelines or comply with the enhanced disclosure requirements.

Updates for FPIs with Segregated Portfolios

For FPIs that operate segregated portfolios, the circular specifies that all compliance obligations, including disclosure requirements, apply separately to each portfolio. This ensures that each segregated portfolio is treated as a distinct entity.

In cases where a breach occurs in one portfolio, any necessary liquidation measures will apply only to that specific portfolio, leaving others unaffected. This approach helps maintain stability across an FPI’s operations while addressing individual compliance lapses.

Transition Provisions

The circular provides a transition period for FPIs to align with the new rules. Existing ODIs that involve derivatives as the underlying asset or that use derivative hedging are allowed a limited timeframe for redemption or adjustment to comply with the revised regulations. Similarly, FPIs issuing ODIs are granted time to secure the required dedicated registration.

Final Words

SEBI’s revised regulations mark a significant shift in the governance of ODIs and FPIs with segregated portfolios. By introducing tighter controls, enhanced disclosures, and stricter compliance measures, the circular aims to bolster the integrity and transparency of India’s capital markets. These reforms are expected to mitigate risks, prevent misuse, and create a more secure and equitable environment for both domestic and foreign investors.


[1] https://www.sebi.gov.in/legal/circulars/dec-2024/measures-to-address-regulatory-arbitrage-with-respect-to-offshore-derivative-instruments-odis-and-fpis-with-segregated-portfolios-vis-vis-fpis_89986.html.