Sebi floats consultation paper on investment through ODIs, FPIs' segregated portfolios

Sebi on Tuesday proposed a new framework to improve disclosure and regulatory requirements for investments made through Offshore Derivative Instruments (ODIs) and segregated portfolios of Foreign Portfolio Investors (FPIs).

At present, foreign investments via ODIs and segregated portfolios of FPIs currently have fewer disclosure and regulatory requirements compared to regular FPIs under Sebi regulations. This includes exemptions from the additional disclosure requirements introduced in August 2023.

To address the regulatory gap, Sebi has proposed to make the additional disclosure requirements specified in August 2023 applicable to certain FPIs should apply to ODI subscribers, and segregated portfolio of FPIs with sub-funds or separate classes of shares or equivalent structure.

"Accordingly, the concentration criteria and size criteria shall be applicable directly to ODI subscribers, to be monitored by ODI issuers and their DDPs/ depositories," Sebi proposed.

Further, for computing breach of concentration criteria by an FPI with segregated portfolios, the Indian equity assets under management (AUM) of each of those segregated portfolios should be considered independently.

The FPI issuing the ODI or having a segregated portfolio should be required to ensure compliance in this regard.

Under the additional disclosure, certain FPIs are required to provide detailed information about their ownership, economic interests, and control, down to the level of individual natural persons.

This applies to FPIs meeting either of these criteria holding more than 50 per cent of their Indian equity AUM in a single Indian corporate group (concentration criteria) or holding more than Rs 25,000 crore of equity AUM in the Indian markets, either individually or along with their investor group (size criteria).

Additionally, the regulator has suggested that ODIs can no longer reference or hedge with derivatives. Only cash equity, debt securities, or permissible FPI investments should be allowed, and should be fully hedged on a one-to-one basis.

"ODI issuers shall be prohibited from issuing ODIs with derivatives as reference/underlying and hedging their ODIs with derivative positions on stock exchange," Sebi suggested.

Further, ODIs should be issued through a separate FPI registration with no proprietary investments allowed.

"Over the years, the value of outstanding ODIs has also been decreasing; however, potential regulatory arbitrage still exists between investments made through ODIs/ FPIs with segregated portfolios with sub-fund structures vis-Ã -vis the regular FPI route," Sebi said adding that these proposals seek to address this regulatory arbitrage.

The Securities and Exchange Board of India (Sebi) has sought public comments till August 27 on the proposals.