SEBI has proposed to discontinue the existing exceptions related to use of derivatives by issuers of offshore derivative instruments (ODI). The regulator has also proposed to mandate issuance of ODIs through a separate dedicated FPI registration where no proprietary investments will be permitted.
ODI issuers will be prohibited from issuing ODIs with derivatives as underlying, and hedging their ODIs with derivative positions on stock exchanges, a consultation paper said on Tuesday. Accordingly, ODIs will only have cash equity, debt securities or 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.
The use of derivatives for issuance of ODIs has been a concern for SEBI and an exception was given in 2017, only in respect of derivative positions taken for hedging equity shares held by the FPI, on a one-to-one basis. Further, in view of the difficulty faced by market participants in monitoring this requirement, an alternative approach, requiring separate FPI registration for hedging the ODIs, was given. The alternative approach was further subject to a restricted position limit of 5 per cent of Market Wide Position Limits (MWPL) as against the limit of 20 per cent of MWPL otherwise available to Category I FPIs.
Existing ODIs with derivatives as underlying will be required to be redeemed within a period of one year from the date of issuance of the proposed framework. Further, existing ODIs with cash positions as underlying but hedged with derivatives will either have to be redeemed or hedged with the said cash positions on a one-to-one basis, within 1 year from the date of issuance of the proposed framework in this regard.