India’s capital markets regulator, the Securities and Exchange Board of India (SEBI), has extended the implementation timeline for a sweeping regulatory overhaul concerning offshore derivative instruments (ODIs) issued by Foreign Portfolio Investors (FPIs). Initially slated for enforcement on May 17, 2025, the new framework will now take effect on November 17, 2025. The delay follows industry feedback and aims to ensure a smooth transition. The revised rules call for heightened transparency in ownership disclosures, a ban on hedging ODIs with derivatives, and stricter registration norms—measures designed to curb regulatory arbitrage and enhance market integrity.
Regulatory Recalibration Amid Industry Feedback
SEBI’s decision to push the deadline reflects its responsiveness to market concerns. The updated ODI framework, originally announced in December 2024, proposes comprehensive structural changes to the issuance and use of ODIs by FPIs. These include enhanced transparency requirements, stricter eligibility conditions, and more explicit prohibitions on derivative-based hedging.
Responding to representations from stakeholders across the financial ecosystem, SEBI opted to grant an additional six-month window to facilitate compliance and operational readiness. The extension aims to minimize disruption while preserving the intent of regulatory tightening.
Key Highlights of the Revised ODI Framework
Under the new framework, FPIs will face increased scrutiny in their use of ODIs—investment vehicles that allow overseas investors to gain exposure to Indian securities without direct registration.
Prohibition on Derivative Use:
FPIs are barred from issuing ODIs where derivatives serve as the underlying assets. Additionally, ODIs cannot be hedged using derivatives on Indian stock exchanges. The instruments must now exclusively reference cash-market securities, and such exposure must be fully hedged on a one-to-one basis with the same underlying assets.
Segregated Registration for ODI Issuers:
SEBI has mandated that any FPI intending to issue ODIs must obtain a separate, dedicated registration tagged with the suffix “ODI” under the same Permanent Account Number (PAN). This aims to ring-fence ODI activity and enhance regulatory visibility. However, for FPIs already registered and issuing ODIs linked to government securities, the addition of the “ODI” suffix will not be treated as a name change or require a separate registration.
Disclosure Requirements and Thresholds
To strengthen transparency, SEBI has introduced more stringent disclosure requirements for ODI subscribers. Specifically, beneficial ownership must be disclosed down to the level of natural persons in two scenarios:
- If equity ODI exposure accounts for 50% or more of the total securities linked to a single Indian corporate group.
- If the total equity exposure in Indian markets—across ODIs, direct FPI holdings, and entities with shared ownership—exceeds Rs. 25,000 crore.
These provisions are designed to ensure that large exposures cannot be masked through indirect instruments or multi-layered entities.
Exemptions for Specific Institutional Investors
Recognizing the distinct investment objectives of certain global institutions, SEBI has exempted a few categories from the rigorous disclosure mandates. These include:
- Government and government-related investors registered under FPI norms.
- Public Retail Funds (PRFs), provided they pass the prescribed validation checks.
- Exchange-Traded Funds (ETFs) with less than 50% exposure to Indian equities.
This approach balances the need for regulatory oversight with flexibility for reputable, low-risk institutional players.
Outlook: Balancing Transparency and Accessibility
SEBI’s reform of ODI regulations is emblematic of India’s evolving approach to managing capital flows—prioritizing transparency, risk containment, and financial stability. While ODIs have historically provided a useful channel for foreign investment, they have also posed challenges due to opacity and potential for misuse.
By extending the implementation deadline, SEBI has signaled its commitment to inclusive policymaking—one that factors in operational realities without compromising on long-term regulatory objectives. As global interest in Indian equities continues to grow, these reforms are poised to bring greater clarity and resilience to the investment ecosystem.
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