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The offshore derivative instruments or ODI are the investment vehicles that are used by the overseas investors for getting an exposure in Indian equities or equity derivatives. These types of investors generally contact with foreign institutional investors (FII) who are already registered with SEBI. The FII makes purchases on behalf of those investors and the related FIIs issue ODIs to them. As per Section 2(1) (j) of the FPI Regulations 2019, the offshore derivate instruments mean any instrument issued overseas by FPI against securities held by it that are listed or proposed to be listed on any recognised stock exchange in India. ODIs can only be issued to those persons who are regulated by an appropriate foreign regulatory authority and after complying with “Know Your Client” norms. To regulate offshore derivative instruments, the SEBI consolidates the conditions, KYC norms and reporting requirements. The present article will discuss such provisions in accordance with the master circular for FPI, DDP and eligible foreign investors.
The condition for the issuance of Offshore Derivative Instruments are:
In order to better understand the ODIs reference and their allowance, the following table shall be referred to:
|ODI reference||ODI issuers holding in India against the ODI||Allowed||Exception|
|Cash Equity or Debt Securities or any Permissible investment by FPI||Cash Equity or Debt Securities or any Permissible investment by FPI for the life of ODI||yes||None However, Separate registration is required to undertake any proprietary derivative transactions by FPI issuing ODI.|
|Cash Equity||Cash equity on the date of writing the ODIs and then moving to derivative positions thereafter.||No||Can do so by separate FPI registration, subject to a 5% limit.|
|Cash equity||A derivative on the date of writing the ODI||No||None|
|Derivatives||Derivatives||No||Can do so through separate FPI registration, provided FPI is holding cash equity and has a future short position exactly against the cash equity in the same security. FPI to retain the cash equity for the life of ODI.|
The KYC norms for Offshore Derivative Instruments subscribers are:
1. The FPIs issuing the ODI are required to maintain the KYC documents of the ODI subscribers at all times and further make them available to SEBI when demanded.
2. The FPIs issuing offshore derivative instruments shall identify & verify the beneficial owners of the ODI subscriber’s entities. The Beneficial owner and intermediate shareholder holding equal and above the threshold in the ODI subscribers need to be identified through a look-through basis. The FPI shall also continue to collect the identification document number of the beneficial owner of the ODI subscriber.
3. The name, country and percentage holding for an intermediate material shareholder or owner entities shall also be disclosed.
4. The KYC review should be done based on the risk criteria as determined below:
5. The FPIs shall issue suspicious transaction reports with the Indian Financial Intelligence Unit.
6. The KYC documents that are required from the ODI subscribers are:
The provision for reporting requirements of Offshore Derivative Instruments and maintenance of control systems are:
1. Reporting of all transfer trails of ODIs: The details of the holder of Offshore Derivative Instruments must be reported to SEBI on a monthly basis. Further, ODI issuers must collect all the details of all the transfers of the ODIs issued by them and make them available to SEBI on demand. SEBI also decides that the monthly reports on ODIs shall include the intermediate transfers undertaken during the month must also be reported.
2. Reconfirmation of ODI positions: the issuers of ODI must carry out the reconfirmation process of the ODI positions on a semi-annual basis. Further, if there is any divergence from the reported monthly data, the same shall be informed to SEBI.
3. Periodic Operational Evaluation: The issuers of ODI are required to put in place such systems and carry out a periodical review and evaluate its controls, systems, and procedures in regard to ODIs. The certificate will be issued on an annual basis to SEBI by the Chief Executive Officer (CEO) or equivalent and shall be filed within one month from the end of every calendar year.
4. Report Details: The following reports must be submitted for the previous month by the 10th of every month.
To regulate offshore derivative instruments, the SEBI has required foreign portfolio investors to comply with the conditions and conduct the KYC before transacting any instruments. Also, the foreign portfolio investor must adhere to the requirements to avoid any non-failure of compliance. Further, the FPI must be required to maintain the KYC document mentioned above from each category for due diligence. Moreover, the report for such transactions shall be made available to SEBI for their scrutiny.
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