SEBI puts restriction on use of P-Note derivatives

The Dollar Business Bureau

Market regulator Securities and Exchange Board of India (SEBI) has banned foreign portfolio investors (FPIs) from issuing the offshore derivative instruments (ODIs) or participatory notes (P-Notes) where underlying is a derivative.

Now, the P-Notes or ODIs can only be issued for the hedging purposes, with respect to the held equity shares.

In addition, the market regulator has said that the prevailing positions on unhedged P-Notes for derivatives have to be liquidated by December 31, 2020.

“The ODI issuing FPIs shall not be allowed to issue ODIs with derivative as underlying, with the exception of those derivative positions that are taken by the ODI-issuing FPI for hedging the equity shares held by it, on a one-to-one basis,” stated a circular issued by SEBI.

The cases, in which the position of underlying derivatives are not for the purpose of hedging of equity shares, the FPI issuing such P-Notes has to liquidate them latest by December 31, 2020 or by the maturity date, whichever is earlier, it said.

With regards to issuing fresh P-Notes for derivatives, the market regulator said that the compliance officer or an equivalent body of the concerned FPI has to issue a certificate to certify that the position of derivatives, is only for the purpose of hedging the equity shares, on a one-to-one basis.

“The said certificate shall be submitted along with the monthly ODI reports,” it added.

The latest move by the SEBI comes at a time when foreign investments via P-Notes have been falling.

Currently, FPIs P-Note holding for derivatives is more than Rs.40,000 crore.

Last month, the market regulator tightened the norms for P-Note by deciding to impose $1,000 fee on every instrument. It banned issuing of these instruments for speculative purpose for checking any misuse to channelise black money.

At the same time, SEBI also relaxed the norms for entry of FPIs, who are willing to directly invest in the country’s markets other than through P-Notes.