The SEBI(Securities and Exchange Board of India) plans to further tighten norms for issuance of ODIs and PNs

What is in news?

The Securities and Exchange Board of India (SEBI) plans to further tighten norms for issuance of offshore derivative instruments (ODIs) and participatory notes (PNs) as part of its overall effort to reduce the exposure investors take via such instruments in the Indian equity market

In a consultation paper released 29th may 2017  the capital market regulator has proposed levying a regulatory fee of $1,000 on every foreign portfolio investor (FPI) that issues ODIs or PNs

How will this work?

It is proposed that beginning April 1, 2017, for a period of every three years, regulatory fees of $1,000 be levied on each ODI issuing FPI for each and every ODI subscriber coming through such FPI

Other measures:

A few ODI subscribers invest through multiple issuers. This move will discourage the ODI subscribers from taking ODI route and encourage them to directly take registration as an FPI

The regulator has also proposed to prohibit ODIs from being issued against derivatives for speculative purposes. Currently, ODIs are issued against derivatives along with equity and debt

SEBI has given time until December 31, 2020, to wind up ODIs issued against derivatives, which are not for hedging purpose

About P-Notes:

P-Notes: Participatory notes, also referred to as “P-notes,” are financial instruments used by investors or hedge funds that are not registered with the Securities and Exchange Board of India (SEBI) to invest in Indian securities

Components: P-notes are offshore derivative instruments with Indian shares as underlying assets

Issuing Authority: Brokers and FIIs registered with SEBI issue the instruments and make investments on the FII’s behalf. Brokers must report their P-note issuance status to SEBI each quarter

Used for/by: The notes allow foreign investors with high net worth, as well as hedge funds and other investors, to invest in Indian markets without registering with SEBI. Investors save time, money and scrutiny associated with direct registration.

Negatives:Indian regulators are not very happy about participatory notes because they have no way to know who owns the underlying securities. It is alleged that a lot of unaccounted money made its way to the country through the participatory note route.

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