Sebi allows FIIs to issue ODIs to NRIs

In an effort to strengthen the regulatory oversight on overseas entities and individuals investing in the Indian capital market,the Securities and Exchange Board of India on Monday introduced the concept of beneficial owner by asking participatory note -issuing foreign institutional investors to report their activities.

In an effort to strengthen the regulatory oversight on overseas entities and individuals investing in the Indian capital market,the Securities and Exchange Board of India (Sebi) on Monday introduced the concept of beneficial owner by asking participatory note (PN)-issuing foreign institutional investors (FII) to report their activities.

It also removed restrictions on FIIs to issue ODI (Offshore Derivative instruments) to non resident Indians (NRI)s. Participatory Notes (PNs) are derivative instruments based on Indian securities issued by FIIs to those overseas entities or individuals who prefer to invest indirectly into Indian stock markets.

In a circular issued on Monday Sebi said that FIIs in their monthly summary report should take an undertaking that the issue of ODI to beneficial owner is in complete compliance with Sebi regulations.

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FIIs were further asked to take an undertaking that the Know Your Customer (KYC) compliance norms have been followed while issuing such instruments to the beneficial owner.

Legal experts pointed out that since the new undertaking specified by the market regulator does not mention about Non Resident Indians (NRI),FIIs will now be allowed to issue ODI to NRIs provided they are fully KYC-compliant.

According to a legal expert with a leading corporate law firm the earlier undertaking by FII read as We undertake that we/ our associates have not issued/ subscribed/ purchased any of the offshore derivative instruments directly to/ from Non Resident Indians/ Indian Residents,.

The regulator also stated that in case an FII issues ODI to another FII which further issues ODI based on the same underlying shares to a third entity,it will be the responsibility of the second FII to report the end beneficiary owner and not the first.

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Sebi has further clarified that FIIs issuing ODI based on non proprietary indices like MSCI World or MSCI Emerging Asia among others,will have to report to the regulator if Indian stocks commands more than 20% weight-age in those indices.

However customs basket would always be reportable if hedged onshore regardless of the percentage of the Indian component that is hedged onshore, said the Sebi circular.