The Securities and Exchange Board of India (SEBI) has introduced new rules for Foreign Portfolio Investors (FPIs) regarding Offshore Derivative Instruments (ODIs). These changes are designed to make India’s financial markets more transparent and safer, especially when it comes to foreign investments. The new rules come after a consultation process, which included discussions on how to strengthen the current framework for FPIs and ODIs.
Key Changes to the Rules:
- Ban on Derivatives as Underlying Assets: FPIs can no longer issue ODIs where derivatives are used as the underlying assets. This change aims to simplify the structure of ODIs and make it clearer for regulators and investors to understand how foreign investments are impacting the Indian markets. By removing derivatives from the equation, SEBI hopes to reduce the complexity and risks associated with these instruments.
- Restrictions on Hedging with Indian Stock Exchange Derivatives: FPIs are now prohibited from hedging ODIs with derivative positions traded on Indian stock exchanges. This restriction ensures that ODIs are fully backed by securities like stocks, with a one-to-one hedge, which means each ODI must be supported by a corresponding security.
- Separate FPI Registration for ODIs: FPIs will now need to register separately for issuing ODIs, with no proprietary investments allowed under this new registration. This step aims to make the process more transparent and to track the exact nature of investments in India. It will also help prevent any confusion between FPIs’ personal investments and their ODI-related activities.
Why These Changes Matter:
These changes come after concerns raised by SEBI regarding the use of derivatives for issuing ODIs, especially after a rule introduced in 2017 allowed some exceptions for hedging. However, there were difficulties in monitoring this rule, prompting the introduction of stricter guidelines.
Nikunj Saraf, Vice President of Choice Wealth, explained that while these new rules will increase market integrity and transparency, they may also limit the flexibility of some investors. Nonetheless, the reforms are likely to help create a more stable and resilient market, which will ultimately be beneficial for the Indian economy.
SEBI’s tightened regulations for FPIs and ODIs are an important step toward improving the transparency and stability of India’s financial markets. While the new rules may make it more difficult for some foreign investors to operate, they are expected to strengthen the market in the long run, protecting investors and ensuring that India’s financial system remains strong and trustworthy.
