SEBI Announces New Guidelines for Offshore Derivative Instruments in India

SEBI Tightens ODI Rules to Curb Regulatory Loopholes and Enhance Market Integrity

In a decisive move to bring greater transparency to India’s capital markets, the Securities and Exchange Board of India (SEBI) has overhauled the regulatory framework governing Offshore Derivative Instruments (ODIs). The fresh guidelines, announced on December 17, 2024, aim to plug regulatory loopholes, discourage speculative arbitrage, and bring offshore flows under clearer oversight.

For years, ODIs—often referred to as participatory notes—have offered foreign investors a route into Indian equities without registering directly with SEBI. But the opacity of these instruments, particularly those linked to derivatives, has long been a concern for regulators. SEBI’s new rules attempt to address exactly that.

What’s Changing: Key Restrictions on ODIs and FPIs

No More ODIs Based on Derivatives

In a major shift, ODIs can no longer be issued referencing derivatives such as futures or options. From now on, they must be based solely on underlying securities like equities. The move effectively shuts down a channel that allowed investors to take leveraged, offshore positions in India’s derivatives market—often without the same level of scrutiny as domestic participants.

Strict Hedging Requirements: 1:1 with Underlying Securities

The regulator has also barred hedging ODI exposures using derivatives on Indian exchanges. Instead, every ODI must be continuously hedged on a one-to-one basis with the exact same underlying securities it represents.

This prevents mismatched risk exposure and ensures that ODI-linked trades mirror the cash market positions they claim to track.

Transition Period for Existing Positions

ODIs that were already referencing derivatives as of December 17, 2024, have been given a one-year window for closure or restructuring. This phase-out timeline is designed to avoid sudden disruptions while ensuring eventual compliance.

Segregating FPI Activity: A New ODI-Specific Registration

To reinforce regulatory clarity, foreign portfolio investors (FPIs) that want to issue ODIs must now apply for a separate FPI registration—distinct from their proprietary investment arm.

This new registration:

Must carry the same name as the parent FPI, with an “ODI” suffix.
Will operate under the same Permanent Account Number (PAN).
Cannot be used for proprietary trades; its role is strictly limited to ODI issuance.

Exception: Government Securities

There is one carve-out—ODIs that reference Government securities will not require this separate registration, reflecting their low-risk profile and strategic importance.

A Closer Look at Ownership: Deepened Disclosure Requirements

Perhaps the most impactful element of SEBI’s directive is the expanded transparency mandate around ODI subscribers. ODI-issuing FPIs must now disclose the full chain of ownership and control—right up to the natural persons involved.

There are no materiality thresholds; even minimal holdings must be reported if they relate to control or economic interest.

These granular disclosures become mandatory in two situations:

When an ODI subscriber holds over 50% of equity-linked ODIs in a single Indian corporate group, or
When the aggregate ODI exposure exceeds ₹25,000 crore across the Indian market.

SEBI has allowed time for implementation. The final deadline to meet these disclosure requirements is November 17, 2025, offering market participants nearly a year to align systems and documentation.

Why This Matters: Regulatory Objectives and Market Impact

Eliminating Regulatory Arbitrage

For years, some investors have used ODIs to gain exposure to India’s equity and derivative markets while avoiding direct FPI compliance. By banning derivative-linked ODIs and enforcing stricter hedging and registration norms, SEBI is closing those backdoors.

Improved Regulatory Oversight

The requirement for separate ODI-centric registrations allows SEBI to track and supervise ODI flows independently, without confusing them with proprietary FPI activity. This distinction should help both surveillance and enforcement.

True Transparency on Offshore Ownership

Perhaps most critically, the new rules lift the veil on who really controls offshore investments. In an environment of rising foreign flows, concentrated bets, and cross-border risks, knowing the real owners behind large ODI positions is not just good governance—it’s essential.

Quick Reference: SEBI’s New ODI Framework at a Glance

Aspect	SEBI Directive
ODI Reference	Only permitted on securities—not derivatives
Hedging	Mandatory 1:1 hedging with the same underlying security; derivatives banned
FPI Registration	ODI issuers must register separately, with same PAN and an “ODI” suffix
Exemption	No separate registration needed for ODIs on Government securities
Disclosure Requirement	Full ownership/control chain up to natural persons; mandatory above ₹25,000 crore or 50% in a group
Compliance Deadline	Disclosure rules fully effective from November 17, 2025

Final Thoughts

SEBI’s latest overhaul of the ODI framework represents more than a technical adjustment—it’s a philosophical pivot toward greater transparency, clearer accountability, and sharper regulatory control over foreign capital entering India.

For investors who value clarity and for a market that continues to mature on the global stage, these reforms could mark a significant step forward.