SEBI tightens rules for offshore derivatives

The Securities and Exchange Board of India (SEBI) on Wednesday tightened regulations on offshore derivatives by increasing fees and banning the sale of certain products, while at the same time easing registration rules for foreign portfolio investors.

SEBI said its board had decided to impose a fee of $1,000 every three years, starting from April 1 this year, on each offshore derivative instrument (ODI) subscriber to be collected by the issuer.

SEBI also said it would prohibit ODIs that track derivatives except for those issued for hedging purposes, in a statement issued at the conclusion of its quarterly board meeting - sticking closely to draft proposals it issued last month.

At the same time, the regulator proposed easing some rules for foreign portfolio investors, including expanding the eligible jurisdictions for registration under this category to more countries with diplomatic tie-ups with India.

The change is intended to steer more funds to register as foreign portfolio investors instead of investing through ODIs that track Indian assets, which are harder to oversee for Indian regulators.

India has long been suspicious of offshore instruments, such as participatory-notes, or P-notes, because of fears these investments are a conduit for money laundering or the channelling of unaccounted wealth held by Indians abroad into domestic markets.

SEBI Chairman Ajay Tyagi said the goal was not to get rid of products such as P-notes but to provide more regulation and "to make sure that Indian and NRIs (non-resident Indians) don't use that route for investing in India".

"The idea is not at all to ban it but to tighten it," he said at a news briefing.

ODIs such as P-Notes were once a popular way to invest in India but they have decreased in popularity as India has eased norms for direct investment.

Among other actions on Wednesday, the SEBI also relaxed rules for investors buying distressed companies from banks in an effort to help resolve the country's massive bad debt problem.

Investors interested in acquiring companies where banks have swapped part of their loans with equity would not need to make a mandatory open offer provided they were willing to abide with a three-year lock-in and get shareholder approval, SEBI said.

SEBI also said it would review the derivatives market and consult stakeholders, without providing further details.

Tyagi noted at the briefing the regulator had become concerned about the size of the derivatives market relative to cash markets.

Separately, the regulator said it would allow category III alternative investment funds (AIFs), such as hedge funds, to invest in the commodity derivative markets, with some conditions.