SEBI Clarifies: FPIs Can Issue ODIs on Cash Market, Not Derivatives

The Securities and Exchange Board of India (SEBI) has clarified that recent reports about a blanket ban on Foreign Portfolio Investors (FPIs) issuing Overseas Derivative Instruments (ODIs) are incorrect. The market regulator stated on December 18 that FPIs are only prohibited from issuing ODIs with derivatives as the underlying instruments. ODIs referencing cash market securities can continue to be issued as before.

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SEBI addressed the confusion following a circular it issued on December 17. The circular had outlined several changes for FPIs and ODIs, including a restriction on FPIs issuing ODIs with derivatives as reference or underlying instruments. SEBI clarified, “As on date, there are no ODIs with derivative instruments as the underlying,” reaffirming that ODIs tied to cash market securities remain unaffected.

The circular emphasized the need for stricter compliance measures to bring ODIs in line with FPI regulations. One key change is that FPIs must hedge ODIs with the same underlying securities on a one-to-one basis throughout the tenure of the ODI. This move is intended to reduce risks associated with complex financial instruments and to ensure that ODI positions are fully backed by equivalent securities.

SEBI also introduced procedural updates requiring FPIs to issue ODIs exclusively through a dedicated FPI registration. This registration must be under the same Permanent Account Number (PAN) as the parent entity, with the suffix “ODI” in its name. However, this requirement does not apply to ODIs based on government securities, which are exempt from the rule.

To further enhance transparency, SEBI mandated complete disclosure of ODI subscribers. This includes identifying entities with significant economic or control interests, particularly those holding equity positions exceeding ₹25,000 crore in Indian markets. Certain entities, such as government-related investors, Exchange-Traded Funds, and specific pooled investment vehicles, are exempt from these detailed disclosures, provided they meet the outlined criteria.

Transitional provisions have been introduced for existing ODIs with derivatives as their underlying assets. FPIs have up to a year to redeem such ODIs and align their positions with the new hedging requirements. Other changes, including mandatory disclosures for ODI subscribers, will take effect five months from the circular’s issuance date.

SEBI has also called for a standardized operating procedure (SOP) to validate compliance with the updated regulations. The SOP, to be developed in consultation with depositories, custodians, and ODI-issuing FPIs, will be publicly accessible to ensure uniformity and transparency.

The latest measures are part of SEBI’s ongoing efforts to strengthen market integrity and minimize risks linked to derivative-based financial instruments. By enforcing these rules, the regulator aims to maintain a balance between regulatory oversight and operational flexibility for foreign investors.

In Conclusion

SEBI’s clarification underscores that FPIs can continue issuing ODIs referencing cash market securities while adhering to the newly prescribed regulations. The steps aim to foster a transparent and secure investment environment, aligning FPIs and ODIs under a unified regulatory framework.