Sebi tweaks ODI rules; this is how it will affect you

In its board meeting on Thursday, Securities and Exchange Board of India (Sebi) motioned to tweak the norms of its various Off-shore Derivative Instruments (ODI) to keep a tight vigil on black money routed through controversial ODI instruments like Participatory Notes (P-Notes).

At about Rs 2.2 lakh crore, P-Notes account for about 10% of the foreign funds found its way into India. However, this is against the high of 55.7% in 2007.

What are ODIs/ P-Notes?

P-notes, a type of off-shore derivatives instruments (ODIs), allow foreign investors to take exposure to Indian stocks without registering with Sebi. However, these instruments are issued by foreign portfolio investors (FPIs) registered with Sebi.

The markets' regulator has been tweaking the norms for P-Notes for quite some time now to keep a check on black money. 

Previous tweaks made to ODI norms

A Sebi circular dated January 17, 2011, gave a comprehensive reporting framework for ODI issuers. According to it, ODI issuers will be required to provide reports on a monthly basis in a prescribed format containing detailed information pertaining to their ODI activities such as name and jurisdiction of the end beneficial owner, details of underlying trade in the Indian market.

• According to the new Foreign Portfolio Investors (FPI) Regulations introduced in 2014, ODIs can be issued by or subscribed to only by appropriately regulated entities.

• A regulated entity, according to the Sebi circular, will be supervised by the securities market regulator or the banking regulator of the concerned foreign jurisdiction.

• Further, the circular explains, an ODI subscriber cannot be a resident in a country identified in the public statement of Financial Action Task Force.

• ODI subscribers are not permitted to have an Opaque Structure(s), which means any structure which does not fully disclose the identity of the beneficial owners.

Sebi makes ODI norms stringent

The Supreme Court-appointed Special Investigation Team (SIT) on black money said that ODI like P-Notes were used to launder black money last year. This is the reason Sebi decided to tweak rules even further to maintain a strict vigil on black money.

The new norms and how it will affect the investor

• If the P-Note holder holds more than 25% or more stake in the company that buys the P-Note then the P-Note issuer will now have to reveal the beneficiary as a norm

• If the P-Note is bought in partnership by five to six people, and they own over 15% in a company, then those persons' KYC -- including address, bank statements, should be notified, a MoneyControl report said. 

• If it is widely held and none of the persons involved own over 1% of the P-Note holding company then there's no issue, the report said.

• In order to exert more control over the issuance of ODIs, the ODI subscribers will have to seek prior permission of the original ODI issuer, which was not necessary before.

• The Board decided that along with the monthly reports on ODI holders all the intermediate transfers during the month would also be required to be reported.

• Now, brokerages who sell the P-Notes or similar ODIs will have to follow Indian KYC norms. So far, only foreign KYC norms were applicable to them, a MoneyControl report said.

• ODI Issuers shall be required to file suspicious transaction reports with the Indian Financial Intelligence Units.

• ODI Issuers shall be required to carry out a reconfirmation of the ODI positions on a semi-annual basis.

• ODI Issuers shall be required to put in place necessary systems and carry out a periodical review and evaluation of its controls.

Take a look at how markets reacted to Sebi's move.