Sebi restricts use of P-Note derivatives

Sebi has put in place restrictions on foreign portfolio investors from issuing participatory notes where the underlying asset is a derivative, as the markets regulator continues to make norms stricter for such instruments.

Now, participatory notes or Offshore Derivative Instruments (ODIs) where the derivative is underlying can be issued only for the purpose of hedging with respect to the equity shares held.

Besides, the watchdog has said that existing positions on unhedged P-Note derivatives have to be liquidated by the end of December 2020.

"The ODI issuing FPIs (Foreign Portfolio Investors) shall not be allowed to issue ODIs with derivative as underlying, with the exception of those derivative positions that are taken by the ODI-issuing FPI for hedging the equity shares held by it, on a one-to-one basis," according to a Sebi circular.
 

In cases where the underlying derivatives position are not for purpose of hedging the equity shares, the issuing FPI has to liquidate such P-Notes latest by the date of maturity or by December 31, 2020, whichever is earlier.

With respect to issuance of fresh P-Notes with derivatives as underlying, Sebi has said a certificate has to be issued by the compliance officer or equivalent entity of the FPI concerned.

It should be certified that the derivatives position on which the ODI is being issued is only for hedging the equity shares held by it, on a one-to-one basis, as per the circular.

"The said certificate shall be submitted along with the monthly ODI reports," it added.

As per Sebi, the term "hedging of equity shares" means taking a one-to-one position in only those derivatives which have the same underlying as the equity share.

The latest measure also come at a time when the value of foreign investments through P-Notes have been on the decline.

Last month, Sebi tightened P-Note norms by deciding to levy a fee of USD 1,000 on each instrument and barred their issuance for speculative purposes to check any misuse for channelising black money.

At the same time, the regulator also decided to relax the entry norms for foreign portfolio investors willing to invest directly in Indian markets rather than through participatory notes.