Changes proposed for offshore derivative instruments

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The Securities and Exchange Board of India (SEBI) has issued a consultation paper proposing: (1) to levy regulatory fees on foreign portfolio investors (FPIs) issuing offshore derivative instruments (ODIs); and (2) to prohibit the issuance of ODIs against derivatives except for those used for hedging.

SEBI said that in order to further enhance transparency in the process of issuance and monitoring of ODIs being issued by the FPIs, and to ensure that the ODI route is not misused, it has been continuously making regulatory changes. These changes require significant expenditure on manpower and systems in order to quickly analyse the voluminous data being submitted by ODI-issuing FPIs. SEBI has put in place dedicated IT systems for ODI issuers to report the beneficial owners and other details of ODI subscribers. Regulatory fees may therefore be levied on FPIs issuing ODIs and the group entities of such FPIs, which may be involved in taking underlying positions in the Indian securities market.

Presently, ODIs are being issued against derivatives along with equity and debt. As of April 2017, the ODIs issued against derivatives had a notional value of ₹401.65 billion (US$6 billion), which is 24% of the total notional value of outstanding ODIs. SEBI has therefore proposed to prohibit ODIs from being issued against derivatives for speculative purposes.

The business law digest is compiled by Nishith Desai Associates (NDA). NDA is a research-based international law firm with offices in Mumbai, New Delhi, Bengaluru, Singapore, Silicon Valley and Munich. It specializes in strategic legal, regulatory and tax advice coupled with industry expertise in an integrated manner.