India’s SEBI Tightens Rules, Reporting Norms for Foreign Portfolio Investors

Posted by Written by Archana Rao Reading Time: 3 minutes

India’s Securities and Exchange Board of India (SEBI) introduced stricter regulations on December 17, 2024, to govern offshore derivative instruments (ODIs) and foreign portfolio investors (FPIs). These updates, effective immediately for most FPIs and ODIs, aim to enhance oversight of offshore derivative transactions in India’s capital markets.

As per the updated framework announced on December 17, 2024, foreign portfolio investors (FPIs) in the Indian capital market are no longer permitted to issue offshore derivative instruments (ODIs) with derivatives as underlying assets, according to SEBI’s circular. This measure aims to restrict the use of complex financial instruments that might obscure the actual nature of foreign investments. 

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Additionally, FPIs are prohibited from hedging their ODIs through derivative positions on Indian stock exchanges, a move intended to prevent market manipulation by curbing speculative activities or offsetting ODI exposures. ODIs serve as instruments that enable foreign investors to access Indian equities or equity derivatives without needing to register directly in the country. 

SEBI has also introduced stricter reporting obligations for FPIs. FPIs must now collect and maintain detailed information on the ownership of entities controlling the ODIs they issue.

Tightening controls on ODI issuance 

SEBI has revised certain rules regarding ODIs and FPIs with segregated portfolios. As per the capital market regulator’s master circular, the conditions for issuing ODIs are as follows: 

  1. FPIs can issue ODIs only through a separate and dedicated FPI registration that does not involve proprietary investments. This registration must include the suffix “ODI” in the name under the same PAN (Permanent Account Number). If an existing FPI requests this addition, it will not be treated as a name change, and the Designated Depository Participant (DDP) can process the request and issue a new FPI registration certificate. However, this separate registration is not required for ODIs referencing government securities. 
  2. FPIs are prohibited from issuing ODIs with derivatives as the underlying assets. 
  3. FPIs cannot hedge their ODIs using derivative positions on Indian stock exchanges. ODIs must be backed only by securities (excluding derivatives) and must be fully hedged with the same securities on a one-to-one basis throughout the ODI’s tenure. 

DDPs are SEBI-authorized intermediaries responsible for managing the registration and compliance of FPIs in India. They act as a bridge between FPIs and the Indian financial market, ensuring that all foreign investments comply with SEBI regulations. 

Additional disclosure for ODI subscribers 

SEBI has mandated additional disclosures for ODI subscribers meeting certain criteria. FPIs issuing ODIs must collect detailed ownership information, identifying all entities with any ownership, economic interest, or control over the ODI subscriber, down to the level of individual natural persons, with no thresholds. This data must be submitted to the depositories in a specified format if the ODI subscriber meets any of the following criteria: 

  1. The ODI subscriber holds over 50 percent of its equity ODI positions in securities related to a single Indian corporate group through the ODI-issuing FPI.
  2. The ODI subscriber has equity positions in Indian markets exceeding INR 250 billion (US$2.94 billion), which includes:
  • Equity ODI positions taken through one or more ODI-issuing FPIs. 
  • Equity ODI positions of entities with more than 50 percent common ownership or control with the ODI subscriber. 
  • Direct equity holdings of the ODI subscriber as a registered FPI. 
  • Equity holdings of FPIs with more than 50 percent common ownership or control with the ODI subscriber. 

Depositories refer to entities responsible for maintaining records of securities ownership and facilitating the smooth transfer of securities in the financial markets. In India, the two main depositories are: 

  1. National Securities Depository Limited (NSDL) 
  2. Central Depository Services (India) Limited (CDSL) 

The SEBI master circular also mentions that the depositories are advised to put in place appropriate systems, procedures and mechanisms to ensure compliance with the provisions within 5 months from the date of the issuance of the circular, i.e., December 17, 2024.

Enhancing transparency in the capital market 

SEBI has implemented more stringent reporting requirements for FPIs as part of its efforts to enhance transparency in the capital markets. Under the updated guidelines, FPIs are now obligated to collect and maintain comprehensive information about the ultimate ownership of entities that control the ODIs they issue. This means FPIs must have a clear record of the individuals or organizations that hold a significant stake in these instruments. 

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The purpose of this measure is to ensure greater accountability and provide regulatory authorities with the ability to trace the source of foreign investments more effectively. By requiring this detailed ownership data, SEBI aims to prevent any misuse of ODIs for indirect control of Indian companies or for circumventing regulatory norms. This initiative will also assist in identifying potential risks associated with foreign investments and ensuring compliance with the established investment framework. These enhanced reporting obligations represent a significant step toward fostering a more transparent and secure investment environment. 

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(US$1 = INR 84.94)