SEBI directed FPIs to ensure FPI regulations to issue ODIs, especially P–notes

The Securities and Exchange Board of India (SEBI) on 25 November 2014 directed Foreign Portfolio Investor (FPI) to ensure compliance with all necessary norms of Foreign Portfolio Investment (FPI) Regulations before issuing Offshore Derivative Instruments (ODIs) especially participatory notes (P-notes) with immediate effect. With respect to this SEBI issued the guidelines outlining the details.

The guidelines were issued after SEBI found that there could be probable misuse of Offshore Derivative Instruments especially P-Notes for money laundering and other such purposes.  

SEBI Guidelines
• Offshore Derivative Instruments (ODIs) can be issued by only to an FPI who is the resident of a country whose securities market regulator is a signatory to International Organization of Securities Commission’s (IOSCO)
• Foreign entities only those countries who have signed multilateral Memorandum of Understanding (MoUs) or a signatory to bilateral (MoUs) with SEBI are eligible for issuance ODIs.
• If any bank is an applicant, it must be the resident of a country whose central bank is a member of Bank for International Settlements.
• Foreign portfolio investors who are two or more ODI subscribers having common Beneficial Owner (BO) shall be considered together as a single ODI subscriber, in the same manner as is being done in the case of FPIs.  
• The investment as FPI and positions held as ODI subscriber will be clubbed together with reference to investment restrictions.
• All new foreign investors keen to invest in Indian markets will need to register as FPIs, which have been divided into three categories as per their risk profiles.
• Foreign funds with opaque structures will not be allowed to come in under the new FPI regime.
• The existing ODI positions will be allowed to continue till expiry if they are not in compliance with the relevant provisions of Foreign Portfolio Investment (FPI) Regulations but any additional issuance, renewal or rollover of such non-compliant positions will not be permitted.

About Participatory notes
Participatory notes (P-notes) are mostly used by overseas HNIs, hedge funds and other foreign institutions to invest in Indian markets through registered foreign institutional investors without directly registering directly with SEBI. It helps investors avoid the time, cost and other procedural issues associated with direct registration.

The value of outstanding investments through participatory notes (P-notes) into India’s capital market of India stood at 2.66 trillion rupees till end of October 2014, which is the highest level in almost seven years.