Offshore Derivative Instruments (ODIs)

Context:

The Securities and Exchange Board of India (SEBI) has extended the implementation deadline for its revised Offshore Derivative Instruments (ODIs) framework from May 17, 2025, to November 17, 2025. The move comes after market participants requested additional time to meet the new compliance requirements.

Offshore Derivative Instruments (ODIs)

Offshore Derivative Instruments (ODIs), including Participatory Notes (P-notes), are financial instruments issued by SEBI-registered Foreign Institutional Investors (FIIs) or Foreign Portfolio Investors (FPIs) to overseas investors who wish to invest in Indian securities without direct registration with SEBI.

Key Features

• Purpose: Facilitate indirect access to Indian equities and derivatives for foreign investors.
• Issued by: SEBI-registered FPIs/FIIs to overseas clients.
• Underlying Assets: Indian equity shares, equity derivatives (e.g., Nifty futures).
• Investor Motivation: Confidentiality, regulatory ease, and quicker market access.

Types of ODIs

• Participatory Notes (P-notes)
• Equity-Linked Notes
• Capped Return Notes
• Participating Return Notes

Regulatory Concerns and SEBI Actions

• Concerns: Lack of transparency, potential for round-tripping, and money laundering.
• Regulatory Amendments:
  • FPIs prohibited from issuing ODIs with derivative exposure (Dec 2024).
  • ODI issuers must disclose the ultimate beneficial ownership of investors.
  • No hedging allowed for ODIs using Indian market derivatives.
  • Enhanced disclosure norms for FPIs with segregated portfolios to prevent regulatory arbitrage.

Key Features of the Revised ODI Framework

1. Enhanced Disclosure Norms:
   • ODI subscribers must provide detailed disclosures if:
     • Over 50% of their equity ODI holdings are in one Indian corporate group, or
     • Total equity ODI exposure in India exceeds ₹25,000 crore.
   • Objective: Align ODI regulations with Foreign Portfolio Investors (FPI) norms and reduce regulatory arbitrage.
2. Restrictions on Derivative Usage:
   • ODIs cannot be based on derivative instruments.
   • Derivatives cannot be used for hedging ODI positions.
   • All ODI positions must be fully backed one-to-one by non-derivative securities.
3. Separate Registration for ODI Issuers:
   • FPIs issuing ODIs must obtain a separate registration with an “ODI” suffix under the same PAN.
   • No new registration needed if ODIs are solely backed by government securities.
   • This addition won’t be treated as a name change for existing FPIs.

Source
The Economic Tim