SEBI tightens ODI norms, FPIs face stricter granular disclosure rules

The Securities and Exchange Board of India (SEBI) on Tuesday introduced a series of regulatory changes aimed at tightening offshore derivative instruments (ODIs) norms and addressing arbitrage by foreign portfolio investors (FPIs), including new guidelines for segregated portfolios.

ODIs are vehicles that allow foreign investors to invest in Indian equities or equity derivatives without registering in the country.

In a circular dated December 17, SEBI barred FPIs from issuing ODIs with derivatives as underlying assets or using derivatives to hedge ODI positions on Indian stock exchanges. Existing derivative-based ODIs and their corresponding hedges have been granted a one-year transition period for alignment.

In cases where an ODI is hedged using derivatives, there are concerns regarding multiple levels of leverage, SEBI had said, adding that it leads to shifting the leverage from overseas to the Indian ecosystem.

The regulator also mandated that ODIs can only be issued by FPIs registered under a dedicated suffix, labelled “ODI,” under the same PAN. FPIs issuing ODIs must now ensure these instruments reference only securities (excluding derivatives) and are fully hedged with a one-to-one underlying position. This rule excludes government securities.

The overseas investors must collect and maintain ownership information about shareholders who control the ODIs they issue.

SEBI also mandated granular disclosures for ODI subscribers meeting specific criteria that will identify all entities holding ownership, economic interest, or exercising control up to the level of natural persons without any threshold. ODI issuing FPIs will now collect and submit full ownership and control details of ODI subscribers to the depositories.

As per the circular, the granular disclosure norm applies to ODI subscribers who fulfil the following criteria:

1. ODI subscribers holding more than 50% of their equity ODI positions through the ODI issuing FPI in ODIs referenced to securities of a single Indian corporate group.

2. ODI subscribers holding equity positions exceeding ₹25,000 crore in Indian markets.

Certain entities such as government and government-related investors registered under FPI regulations, Public Retail Funds (PRFs), subject to validation and Exchange Traded Funds (ETFs) with less than 50 per cent exposure to Indian equity markets are exempt from these disclosures.

SEBI further refined the regulatory treatment of segregated portfolios under FPIs. Disclosure requirements will now apply individually to each segregated portfolio, with each portfolio treated as a separate FPI for compliance. In the event of a breach of compliance criteria by any segregated portfolio, liquidation requirements will apply only to the specific portfolio in violation, leaving others unaffected.

While the new provisions concerning ODI issuance and segregated portfolios take immediate effect, enhanced disclosure norms for ODI subscribers and investor groups will be implemented after a five-month window. SEBI has directed depositories to update systems to facilitate compliance.

The measures are expected to enhance transparency, prevent regulatory arbitrage, and strengthen oversight over offshore investments in Indian markets.