The market regulator has proposed changes to regulations governing foreign portfolio investors (FPIs) to address a regulatory arbitrage.
It has suggested that additional disclosure norms applicable to certain FPIs through the August 2023 circular be made applicable to offshore derivative instrument (ODI) subscribers and to segregated portfolios of FPIs.
In a consultation paper released on August 6, the Securities and Exchange Board of India (Sebi) has said that investments made by foreigners through ODIs or through segregated portfolios not subject to the same set of disclosure and other regulatory requirements as regular FPIs. This includes the additional disclosure requirements placed on certain FPIs who were asked to identify beneficial ownership, economic control and economic interest on a look through basis.
The consultation paper said that it was giving rise to a regulatory arbitrage.
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Therefore, the paper proposed making, "the disclosure requirements specified under the August circular applicable directly to (i) ODI subscribers, and (ii) segregated portfoli (s) of FPIs with sub-funds or separate classes of shares or equivalent structure(s)."
It added, "Accordingly, the concentration criteria and size criteria shall be applicable directly to ODI subscribers, to be monitored by ODI issuers and their DDPs/ Depositories. Further, for computing breach of concentration criteria by an FPI with segregated portfolios, the Indian equity AUM of each of those segregated portfolios shall be considered independently. The FPI issuing the ODI or having segregated portfolio shall be required to ensure compliance in this regard."
The regulator has also made other proposals such prohibiting the issue of ODIs with derivatives as reference/underlying and prohibiting hedging their ODIs with derivative positions on stock exchanges.
The paper said, "ODIs shall only have cash equity/ debt securities/ any permissible investment by FPI (other than derivatives) as underlying and shall only be fully hedged with the same securities on a one-to-one basis, throughout the life of the ODI."
To ensure that this requirement is easy to comply with, the regulator has also proposed that that ODIs be issued only through separate, dedicated FPI registration where no proprietary investments will be permitted.
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