Sebi tightens ODI tips to curb hypothesis and enhance market integrity

The market regulator has launched new laws searching for a transparent segregation of offshore spinoff devices (ODIs) and international portfolio traders (FPIs) and mandated extra disclosures to cut back systemic dangers in India’s capital markets.

ODIs are funding autos that enable abroad traders to realize publicity to Indian equities or fairness derivatives. Whereas the ODI issuer owns the underlying securities, the financial advantages are transferred to the subscriber of those devices.

The brand new laws observe a proposal made in August 2024 to harmonize the disclosure necessities for FPIs and lengthen them to ODI subscribers.

A key change launched by Securities and Alternate Board of India (Sebi) is measures to curb over-leveraging and speculative practices by prohibiting the hedging of ODIs with derivatives traded on Indian inventory exchanges. As a substitute, ODIs should be absolutely hedged with the underlying securities on a one-to-one foundation, lowering the systemic dangers posed by derivative-based merchandise.

To restrict the focus of international affect, Sebi has additionally imposed a cap on ODI positions linked to a single company group. ODI subscribers can not maintain greater than 50% of their fairness positions in securities associated to at least one Indian company group. Furthermore, a 3% cap has been launched on the cumulative holdings of FPIs and ODI subscribers within the apex firm of a company group with no recognized promoter, with a requirement to cut back or disclose holdings exceeding this threshold.

To permit market members time to regulate, Sebi set transitional deadlines. ODIs issued with derivatives as underlying property should be redeemed inside one yr, and present ODIs hedged with derivatives should be absolutely hedged with the underlying securities inside this timeframe. FPIs with excellent ODIs are additionally required to acquire separate registrations by this deadline. These measures purpose to boost transparency and cut back systemic dangers in India’s monetary markets.

The ban on derivative-based ODIs and the necessary granular possession disclosures would enhance transparency and curb the misuse of ODIs by opaque entities, mentioned Ashish Padiyar, co-founder of wealth administration firm Bellwether Associates .

“The three% cap on holdings in apex firms prevents extreme international management in important company teams,” mentioned Padiyar. “The requirement for ODIs to be absolutely hedged with the identical underlying securities will mitigate over-leveraging dangers, however compliance prices might rise for FPIs, doubtlessly deterring smaller traders.”

In response to Narinder Wadhwa, managing Director & CEO of SKI Capital, Sebi’s actions will cut back speculative actions within the spinoff market and enhance market stability. “By prohibiting ODIs with derivatives as underlying property, Sebi goals to restrict extreme volatility, which is able to improve the integrity of the market.”

Nevertheless, he additionally identified the extra compliance burdens on FPIs, which can must revise their operational buildings to fulfill the brand new registration necessities. FPIs will probably have to regulate their funding methods, significantly those that beforehand relied on ODIs with derivatives.

The round additionally requires FPIs to problem ODIs solely by way of a separate, devoted FPI registration, which should have the suffix “ODI” to differentiate it from different FPIs.

Possession disclosures

Sebi additionally mandated extra detailed disclosure by FPI issuers of ODIs. They have to accumulate and disclose complete details about all entities with possession stakes or management over the ODI subscriber on a “look-through” foundation, right down to particular person pure individuals.

These disclosures are required when ODI subscribers maintain greater than 50% of their fairness by way of the issuing FPI or when their fairness positions in India exceed ₹25,000 crore. Sure traders, reminiscent of government-related entities, public retail funds, and college endowments, are exempt from these disclosure necessities, as they pose decrease regulatory dangers.

The brand new laws will improve transparency within the operations of FPIs issuing ODIs, based on Anita Gandhi, founder & head of Establishment at Arihant Capital Markets Ltd. “By segregating proprietary investments from consumer positions, these measures will cut back the potential for abuse.”

Nikunj Saraf, vice chairman at Alternative Wealth, referred to as it a “daring round” that goals to cut back systemic dangers and convey extra transparency to the market. “Whereas the elevated compliance prices might discourage short-term gamers, these reforms are prone to entice long-term institutional traders who worth stability and transparency,” Saraf mentioned.

Whereas the restrictions on derivative-based ODIs may cut back liquidity, the general affect could be constructive in the long run as Sebi’s measures are anticipated to result in a extra resilient fairness market, he mentioned.