Until now only certain categories of FPIs under the SEBI (FPI) Regulations, 2014, were permitted to subscribe to, or otherwise deal in, offshore derivative instruments if, the counterparty in such transactions was regulated by an appropriate foreign regulatory authority. However, the meaning of the phrase ‘regulated by an appropriate foreign regulatory authority’ was ambiguous. Although ‘appropriately regulated’ under the FPI Regulations generally meant that, such a body is ‘regulated or supervised by the securities market regulator or the banking regulator of the concerned foreign jurisdiction’, there were no specific criteria for determining the eligibility of an ODI subscriber (not being an FPI) as a counterparty in an ODI transaction involving an FPI.

SEBI, by its Circular dated 24 November, 2014, has prescribed conditions for the issuance of ODIs by FPIs, including the criteria for determining the eligibility of ODI subscribers. ODIs are used by foreign investors, as a means to retain economic interest over an asset without changing the legal ownership of the underlying asset, such as, Indian listed equity shares. To prevent the layering of investments through the ODI route, the Circular imposes the eligibility criteria for FPIs under Regulation 4 of the FPI Regulations on prospective subscribers of ODIs issued by FPIs. As per the Circular, in addition to the requirements under Regulation 22, ODIs can only be subscribed by entities which meet the eligibility criteria under Regulation 4 of the FPI Regulations. Regulation 4 prescribes certain requirements such as the entity is resident of a country whose securities market regulator is a signatory to the IOSCO’s Multilateral MoU or a signatory to bilateral MoU with SEBI; the entity is legally permitted to invest in securities outside the country of its incorporation or establishment or place of business.

Moreover, the ODI subscriber should not have an ‘opaque structure’, such as a protected/ segregated cell company, as understood under Explanation 1 of Regulation 32(1)(f) of the FPI Regulations. The investment restriction of 10% applicable to FPIs under Regulation 21(7) of the FPI Regulations would also be applicable to ODI subscribers. Thus, ODI subscribers with the same beneficial owner, can take a maximum exposure of 10% of the total issued capital of a company. If FPIs hold investments through the FPI route along with ODI positions, their ODI positions would be clubbed with the FPI investments for determining investment limits under the FPI Regulations. The requirements under the Circular would be applicable prospectively and all existing ODI positions would be legally valid until their expiry.