Sebi proposes separate FPI registration for issuing ODIs, P-notes

The Securities and Exchange Board of India (Sebi) plans to make separate registration mandatory for Foreign Portfolio Investors (FPIs) which issue offshore derivative instruments (ODIs) also known as P-notes.

Participatory notes or P-notes are a type of ODI financial instruments used by hedge funds to invest in Indian securities. However, there is no uniform practice for using a separate account for the issuance of ODIs.

In a consultation paper floated on Tuesday, the market regulator has also proposed to discontinue existing exceptions provided for ODI issuers thus restricting issue of ODIs with derivatives as underlying or hedging their ODIs with derivative positions on stock exchanges.

 

“ODIs shall only have cash equity/ debt securities/ any permissible investment by FPI (other than derivatives) as underlying and shall only be fully hedged with the same securities on a one-to-one basis, throughout the life of the ODI,” said Sebi.

Sebi added that existing ODIs with derivatives as underlying will be required to be redeemed within a year once these proposed norms are made effective.

Sebi said that there were only four ODI issuers with outstanding ODIs worth Rs 3,075 crore that are hedged with derivatives.

Though several restrictions have been brought in to remove opacity around ODIs across decades, at present ODIs can be issued by category I FPIs in certain cases after compliance with know-your-client (KYC) norms.

The capital market regulator also plans to extend granular disclosure norms applicable on foreign portfolio investors (FPIs) to Offshore Derivative Instruments (ODI) also known as P-notes, sub-funds, and a wider set of portfolios.

As per Sebi data, the total value of ODIs or P-notes as a percentage of the assets under custody (AUC) of FPIs has dropped from 44.4 per cent at the end of FY2007 to 2.1 per cent as of FY24.

In August last year, the market regulator had issued a circular to FPIs mandating disclosures on economic interest and beneficial ownership after it faced challenges in cases like that of allegations against the Adani group of violating norms through FPIs.

Sebi had specified thresholds such as over 50 per cent exposure by an FPI in a single corporate group or Rs 25,000 crore equity exposure in India.  In a consultation paper floated on Tuesday, Sebi has proposed expanding this disclosure mandate to a wider set of offshore investors and sub-funds.

“The concentration  criteria  and  size  criteria  shall  be  applicable directly  to ODI  subscribers,  to  be  monitored  by  ODI  issuers  and  their  DDPs/ Depositories,” said Sebi.

Further,  for  computing  breach  of  concentration  criteria by an FPI with segregated portfolios, the Indian equity AUM of each of those  segregated  portfolios  will  be  considered  independently.