The Securities and Exchange Board of India (“SEBI”) has recently notified additional disclosure requirements that apply to subscribers of offshore derivative instruments^[1] (“ODIs”) issued by foreign portfolio investors (“FPIs”).  In addition to stipulating these disclosure requirements, the SEBI circular on ‘Measures to address regulatory arbitrage with respect to Offshore Derivative Instruments (ODIs)and FPIs with segregated portfolios vis-à-vis FPIs’ (“ODI Circular”) issued on 17 December 2024, has also made a few other significant changes to the ODI regime.

Background 

SEBI had, by a circular in August 2023, introduced additional disclosure requirements for FPIs that (i) hold more than 50% of the Indian equity assets under management in a single Indian group; and (ii) individually or together with their investor group hold more than INR 25,000 crore (INR 250 billion) of equity assets under management in Indian markets. An FPI that meets any of these tests is required to provide granular details of all entities holding any ownership, economic interest, or exercising control in the FPI, on a full look through basis, up to the level of all natural persons, without any threshold, to the designated depository participant of the FPI, unless it is subject to an exemption or brings its holdings under the relevant thresholds within prescribed timelines. These additional disclosure requirements only applied to FPIs and not to ODI investors.

Subsequently, SEBI had issued a consultation paper in August 2024^[2] (“ODI Consultation Paper”) seeking comments inter alia on its proposal to also extend these disclosure requirements to ODI subscribers and to investors that invest through FPIs with segregated portfolio or equivalent structures. These proposals were approved by the SEBI board at its meeting held on 30 September 2024 and have now been implemented through the ODI Circular.

Position after the ODI Circular 

1.Issuance of ODIs 

1.1 Separate FPI registration 

All ODIs must be issued through a separate dedicated FPI Category I registration under which, no proprietary investments can be made. FPIs that wish to issue ODIs and also undertake proprietary investments must do so through two separate FPI registrations. This requirement does not apply to issuance of ODIs that have Government securities as underlying. ODI issuing FPIs that have ODIs outstanding as on 17 December 2024, must obtain a separate registration for ODI issuances, if so required, within a period of one year.

1.2 ODIs with derivatives as underlying 

FPIs cannot issue ODIs with derivatives as underlying. SEBI has stated that any ODIs with derivatives as underlying/reference that are issued and outstanding as on 17 December 2024 are permitted to be redeemed within a period of one year. 

1.3 Hedging of ODIs 

FPIs cannot hedge ODIs with derivative positions on stock exchanges in India.^[3] ODIs must be fully hedged with the same securities as the underlying on a one-to-one basis through the tenor of the ODI. Any ODIs with securities (other than derivatives) as underlying/reference and hedged with derivatives, that are issued and outstanding as on 17 December 2024, are permitted to be redeemed or hedged with the same securities as the underlying/reference on a one-to-one basis, within a period of one year from 17 December 2024.

2.Additional disclosures 

2.1 Disclosure requirements and implementation timelines 

Granular details of all entities holding any ownership, economic interest, or exercising control in an ODI subscriber, on a full look through basis, up to the level of all natural persons, without any threshold, must be collected by an ODI issuing FPI from its ODI subscribers that meet the Single Group Test or the Equity AUM Test (each as defined below). These additional disclosure requirements for ODI subscribers will come into effect after five months from 17 December 2024.

2.2 SOP 

The detailed mechanism in relation to the additional disclosures will be set out in the Standard Operating Procedure (“SOP”) to be framed and adopted by depositories, custodians and ODI issuing FPIs, in consultation with SEBI. The SOP is required to be framed and made public within two months from 17 December 2024.

2.3 Single Group Test 

An ODI subscriber that has more than 50% of its equity ODI positions through the ODI issuing FPI in ODIs that reference the securities of a single Indian corporate group (“Indian Corporate Group”, and such test, “Single Group Test”) will be required to provide additional disclosures.

2.4 Equity AUM Test 

An ODI subscriber that has equity positions of more than INR 25,000 crore (INR 250 billion) in the Indian markets (“Equity AUM Test”) will be required to provide additional disclosures. For this purpose, equity positions will include (i) equity ODI positions taken by the ODI subscriber (through one or more ODI issuing FPIs); (ii) equity ODI positions taken by other ODI subscribers (through one or more ODI issuing FPIs) that have common ownership, directly or indirectly, of more than 50% or common control with the ODI subscriber; (iii) equity holdings of the ODI subscriber as a registered FPI (i.e. if it itself is also an FPI); and (iv) equity holdings of the FPIs that have common ownership, directly or indirectly, of more than 50% or common control with the ODI subscriber.^[4]

2.5 Exemptions 

2.5.1 ODI subscribers that satisfy certain criteria set out in the ODI Circular are exempt from the additional disclosure requirements. These include, among others, government and government related investors registered as Category I FPIs, public retail funds, and exchange traded funds (with less than 50% exposure to India and India-related equity securities) and entities listed on specified stock exchanges of permissible jurisdictions as notified by SEBI).^[5]

2.5.2 In addition to these general exemptions, the ODI Circular also sets out other specific exemptions that may be available to ODI subscribers that meet the Equity AUM Test or the Single Group Test in some circumstances.

2.6 Exemptions if positions are realigned 

2.6.1 ODI subscribers that meet the Single Group Test will not be required to make prescribed additional disclosures if they realign their positions to below the 50% threshold within 10 trading days of breaching the threshold (but will be subject to restrictions on specified types of new positions for a 30-day period from the date of the breach).

2.6.2 ODI subscribers that meet the Equity AUM Test will not be required to make prescribed additional disclosures if they realign their positions to below the INR 25,000 crore threshold within 90 calendar days from the date of breach of such threshold (but will be subject to restrictions on fresh positions until the equity positions are brought below INR 25,000 crores).

2.7 Disclosure timelines; effect of non-disclosure 

2.7.1 If an ODI subscriber’s equity ODI positions continue to meet the Single Group Test or the Equity AUM Test after the expiry of the prescribed timelines described above, then the relevant ODI issuing FPI must collect required details/disclosures within 30 trading days from the expiry of the relevant timeline. ODI issuing FPIs must submit disclosures to the depositories within 5 trading days from the date such disclosure is made to them.

2.7.2 If an ODI subscriber that is required to provide such disclosure does not do so, then such ODI subscriber will become ineligible to subscribe to or hold any ODI positions through any ODI issuing FPI. ODI issuing FPIs will be required to redeem all ODI positions held by such an ODI subscriber within 180 calendar days from the date of such ineligibility.^[6]

2.7.3 ODI issuing FPIs are required to ensure that details collected from ODI subscribers are updated, and that such updated details are notified to the depositories within 30 days of any change in such details.

3.Additional disclosure requirements for FPIs; Segregated Portfolios 

3.1 Pursuant to the ODI Circular, SEBI has also updated additional disclosure requirements for FPIs that meet the 50% concentration criteria or the equity asset under management threshold to align to the requirements set out for ODI subscribers above.

3.2 SEBI has additionally mandated that for FPIs that have segregated portfolios (i) the 50% concentration criteria and equity asset under management threshold will apply individually to each segregated portfolio; (ii) each segregated portfolio will be treated as a separate FPI for the purpose of compliance with the additional disclosure requirements; and (iii) if disclosure requirements are breached and the FPI’s holdings are required to be liquidated, then such liquidation requirements will apply only to the relevant segregated portfolio that breaches such requirements and not to the FPI as a whole.

3.3 The updated disclosure requirements for FPIs will come into effect after five months from 17 December 2024.

4.Issues for consideration 

4.1 ODI issuing FPIs will need to review their existing ODI documentation to assess if they have the contractual right to (i) obtain and pass on required information from their ODI subscribers to depositories; and (ii) unwind an ODI position within 180 days if the ODI subscriber ceases to be eligible to continue to hold ODIs.

4.2 ODI issuing FPIs may also face challenges in ensuring compliance with their obligations of informing the depository of any change in granular details provided by the ODI subscribers within 30 days from such change. FPIs will have to put systems in place (including updating ODI documentation) to obtain updates from ODI subscribers on information previously provided, and to pass on such information to depositories within the 30-day timeline.

4.3 A few other points that will likely require further clarification are:

4.3.1 A literal interpretation of the Single Group Test is that the 50% test is required to be applied with respect to each ODI issuing FPI through whom a subscriber has subscribed to equity ODIs. This would mean that every time an ODI subscriber subscribes to equity ODIs referencing securities of an Indian Corporate Group, through a new FPI issuer, such subscriber would automatically meet the Single Group Test unless it also subscribes (proportionately), within the prescribed realignment timelines, to other equity ODIs (not referencing securities of the Indian Corporate Group as the underlying) issued by the same FPI. However, this appears to be quite onerous and given that the 50% concentration test for FPIs is done on the basis of their consolidated holding of Indian equity assets, in our view, the regulatory intent cannot be to apply an FPI issuer-specific concentration test on the ODI subscriber. Hopefully, the SOP will provide greater clarity on the requirements to be met under the Single Group Test.

4.3.2 Paragraph 1(iv) of Part D of the FPI Master Circular[7], which deals with instruments referencing indices as underlying and states that ‘instruments referencing custom baskets would be ODIs regardless of percentage of Indian component that is hedged onshore in India’, has not been amended by the ODI Circular. It is not completely clear how the requirement to fully hedge ODIs with the same securities on a one-to-one basis throughout the tenor of the ODI should be applied to ODIs that reference indices (non-proprietary as well as proprietary/custom baskets). Hopefully, the SOP will provide further clarity on this point as it would be very difficult for an FPI to achieve one-to-one hedging in the context of an index whose constituents (and relative weighting of constituents) may change from time to time.

4.3.3 While the ODI Circular states that ODI positions of ODI subscribers and holdings of ODI issuing FPIs corresponding to the same underlying/reference shares should only be counted once while computing equity position limits for the purpose of the Equity AUM Test, it remains to be clarified if the additional disclosure requirements that apply to FPIs that meet the Equity AUM Test will now not apply to FPIs that only issue ODIs (on the basis that the ultimate beneficial interest in equity investments of such ODI issuing FPIs will be of the ODI subscribers, and not the FPI itself). Once again, it is hoped that the SOP, once issued, will provide the required clarity on this aspect.

Authors – Rahul Gulati, Partner; Ritika Singal – Managing Associate and Swagata Bhattacharya – Head – Knowledge Management

Footnote:

¹ ODI is defined under the SEBI (Foreign Portfolio Investors) Regulations, 2019, as “any instrument, by whatever name called, which is issued overseas by a foreign portfolio investor against securities held by it in India, as its underlying.”

² SEBI Consultation Paper on investment by Foreign Investors through Segregated Portfolios/ P-notes/Offshore Derivative Instruments dated 6 August 2024. 

³ Prior to the ODI Circular, FPIs were permitted to hedge ODIs with derivative positions on stock exchanges in India in very limited circumstances. These exceptions have now been removed.

⁴ ODI positions of ODI subscribers and holdings of ODI issuing FPIs corresponding to the same underlying/reference shares should be counted only once for avoiding double counting.          

⁵ For an ODI subscriber that meets the Single Group Test or the Equity AUM Test, if any entity that is identified on a look-through basis qualifies for exemption, then no further identification of entities that have ownership interest, economic interest, or control rights of such an entity on look through basis, will be required.

⁶ A list of such ineligible ODI subscribers will be made public by the depositories, and ODI issuing FPIs will be required to ensure that no ODIs are issued to such entities.

⁷ SEBI Master Circular for Foreign Portfolio Investors, Designated Depository Participants and Eligible Foreign Investors dated 30 May 2024.

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