To counter regulatory arbitrage, the market regulator has suggested revisions to the rules regulating foreign portfolio investors (FPIs). It has proposed that segregated portfolios of FPIs and subscribers to offshore derivative instruments (ODIs) be subject to increased disclosure standards by means of the August 2023 circular.
Investments Made Through ODIs
The Securities and Exchange Board of India (SEBI) stated in a consultation paper published on August 6 that foreign investments made through ODIs or segregated portfolios are not subject to the same disclosure requirements or other regulatory obligations as ordinary FPIs. Included in this are the extra disclosure obligations imposed on specific FPIs, who were required to systematically determine beneficial ownership, economic control, and economic interest.
According to the consultation paper, it resulted in regulatory arbitration. Thus, the study suggested that ” the requirements for disclosure specified according to the August circular relevant directly to (i) ODI subscribers, as well as (ii) segregated portfolio(s) of FPIs having sub-funds or different classes of shares or else equivalent structure(s).” “Therefore, ODI subscribers will be directly subject to the concentration and size criteria, which will be overseen by ODI issuers & their DDPs/Depositories,” it continued.
ODIs To Be Issued Exclusively
Additionally, each segregated portfolio’s Indian equity AUM will be taken into account separately when calculating an FPI’s breach of concentration standards. It will be the responsibility of the FPI that issues the ODI or that has a segregated portfolio to guarantee compliance in this area.” The regulator has also proposed further measures, like outlawing the issuance of ODIs with derivatives as reference or underlying and forbidding stock exchanges from using derivative holdings to hedge ODIs.
The document stated, “ODIs will only have debt securities/ cash equity/ any permissible investment through FPI (except derivatives) as of underlying of & of shall be fully guaranteed with those same securities on a one-to-one basis, all through the life of the ODI.” In order to facilitate compliance with this of, the regulator has also suggested that ODIs be issued exclusively through a distinct and dedicated FPI registration, with the prohibition of proprietary investments.
