On 24 November 2014, Securities and Exchange Board of India (SEBI) has issued a circular (bearing no CIR/IMD/FIIC/20/2014) (Circular) imposing certain conditions for the issuance of offshore derivative instruments (ODIs) by Foreign Portfolio Investors (FPIs) under the SEBI (Foreign Portfolio Investor) Regulations, 2014 (FPI Regulations). The Circular seeks to align the eligibility and investment norms under the FPI regime vis-à-vis subscription through the ODI route.

In this Newsflash, we attempt to give a brief overview of the additional conditions imposed by the Circular.


The FPI Regulations require an ODI subscriber to be regulated by an appropriate foreign regulatory authority. The Circular imposes an additional condition that ODI subscribers have to meet the eligibility criteria laid down in Regulation 4 of the FPI Regulations, which state as follows:

  1. The applicant is resident of a country whose securities market regulator is a signatory to International Organization of Securities Commission’s Multilateral Memorandum of Understanding (Appendix A Signatories) or a signatory to bilateral Memorandum of Understanding with SEBI;
  2. The applicant being a bank, is a resident of a country whose central bank is a member of Bank for International Settlements;
  3. The applicant is not a resident of a country identified in the public statement of Financial Action Task Force as:
    1. a jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or
    2. a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the

Khaitan Comment

The intent behind the Circular seems to be that SEBI wants to ensure that regulated entities from jurisdictions that do not conform to global regulatory standards are not able to access the Indian market, without being subject to SEBI’s regulatory oversight.

Opaque Structure

The Circular clarifies that an ODI subscriber shall not have an opaque structure. The FPI Regulations define an ‘opaque structure’ as ‘any structure including protected cell company, segregated cell company or their equivalents, where the details of the ultimate beneficial owners are not accessible or where the beneficial owners are ring fenced from each other or where the beneficial owners are ring fenced with regard to enforcement’.

However, the FPI Regulations also clarify that the FPI satisfying the following criteria shall not be treated as having opaque structure:

  1. the applicant is regulated in its home jurisdiction;
  2. each fund or sub fund in the applicant satisfies broad based criteria; and
  3. the applicant gives an undertaking to provide information regarding its beneficial owners as and when SEBI seeks this information.

Investment Limits

Regulation 21 of the FPI Regulations provides that a single FPI or FPIs belonging to the same investor group cannot hold more than 10% of the share capital of an Indian company.

The Circular extends these investment restrictions to ODI subscribers. The Circular also provides that two or more ODI subscribers having the same ‘Ultimate Beneficial Owner’ would together be considered as a single ODI subscriber, in the same manner as is being done in the case of FPIs. The aggregation would be applicable even in a situation where the ODIs are being subscribed through different issuing FPIs. The Circular further provides that the limit of 10% shall apply on an aggregate of FPI investments and ODI positions held by an FPI in an Indian company.

Khaitan Comment

The inclusion of investments through ODIs for the purpose of calculating the 10% limit under Regulation 21 is a significant change as the industry practice has been to disregard investments made by an entity through ODIs for the purpose of this calculation. This may impact several investors who have acquired interests of more than 10% in individual companies by acquiring holdings simultaneously through both FPI and ODI routes or by investing in ODIs through different entities.


The Circular clarifies that existing ODI contracts which are violative of the Circular can continue till expiry under its term. The Circular prohibits fresh issuances/rollover/renewal of such contracts in violation of the provisions of the Circular.


The primary intent of the Circular seems to be aligning the eligibility criteria for obtaining direct access to the Indian market as an FPI and obtaining indirect access through ODIs and thereby, reduce regulatory arbitrage. This can also be seen in the decision to extend the prohibition on opaque structures to ODI subscribers. As the identity of the ultimate beneficial owners remain anonymous in the case of opaque structures, this prohibition would ensure better quality in the nature of funds, that are being invested through ODIs. Further, the Circular marks another step in SEBI’s attempt to encourage investors to directly invest in India and reduce the use of intermediaries after the introduction of the FPI Regulations. The restrictions on the nature of entities that can subscribe to ODIs appear to be an attempt to identify the ultimate beneficial owner, which is not possible in the case of entities set up as opaque structures. The clubbing of limits of investments as an FPI and through ODIs by the same entity appears to be an attempt to limit influence of individual non-strategic foreign investors in Indian companies.