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Published on 16 July 2025
Sebi Clarifies Regulations on FPIs and Overseas Derivative Instruments
SEBI Clarifies ODI Rules: Cash-Backed Instruments Allowed, Derivative-Based ODIs Prohibited
Amid recent confusion in sections of the media, the Securities and Exchange Board of India (SEBI) has issued a sharp clarification: Foreign Portfolio Investors (FPIs) are not banned from issuing Overseas Derivative Instruments (ODIs). However, the regulator has drawn a clear regulatory line—ODIs referencing derivatives are not permitted, while ODIs backed by cash market securities remain fully allowed.
The clarification, released on December 18, 2024, follows a SEBI circular dated December 17, which some commentators misinterpreted as a blanket ban on all ODI issuance. SEBI has now reaffirmed that ODIs referencing listed equities, government bonds, and other non-derivative cash instruments are unaffected by the latest restrictions.
“The suggestion that SEBI has prohibited all ODI issuance is incorrect,” the regulator stated.
What's Permitted—and What’s Not?
Permitted: ODIs Backed by Cash Securities
FPIs can continue to issue ODIs that are fully backed on a one-to-one basis by underlying cash market instruments such as:
- Listed equity shares
- Government securities (G-Secs)
- Corporate bonds
- Other non-derivative instruments
This form of ODI issuance remains compliant, transparent, and welcome under current Indian regulations.
Prohibited: ODIs Referencing Derivatives
What SEBI has clarified—and enforced—is that FPIs cannot issue ODIs that reference derivatives as their underlying asset. This includes:
- Stock or index futures
- Options
- Any other synthetic derivatives
In addition, SEBI has made it clear that ODIs cannot be hedged through derivatives on Indian exchanges, closing off a common loophole that allowed for indirect speculative positioning.
“As of date, there are no ODIs with derivative instruments as the underlying,” SEBI confirmed in its official communication.
Regulatory Rationale: Preventing Backdoor Derivative Access
ODIs, also known as participatory notes (P-notes), offer a way for overseas investors to access Indian markets without registering directly with SEBI. While they serve as a useful access route, regulators have long been concerned about the use of ODIs for:
- Unregulated speculative trading
- Lack of transparency in beneficial ownership
- High-frequency trades with no underlying cash security backing
By closing the door on derivative-linked ODIs, SEBI aims to prevent proxy derivative exposure that bypasses direct regulatory scrutiny, without stifling legitimate investment through properly backed ODIs.
Compliance Expectations for FPIs
FPIs wishing to continue ODI issuance must adhere to a well-defined regulatory framework:
| Compliance Requirement | Details |
|---|---|
| Underlying Assets | Must be non-derivative, e.g., equities, G-Secs, corporate bonds |
| Backing | ODIs must be fully backed by the referenced securities |
| Separate Registration | Required for ODI activity (except for G-Secs-only ODIs) |
| No Proprietary Trading | The ODI-linked FPI must not engage in proprietary investment |
| PAN and Naming | Must use the same PAN as the primary FPI, with “ODI” in the name |
| No Derivative Hedging | FPIs cannot hedge ODI positions using Indian derivatives |
Media Misconception vs. Regulatory Clarification
| Media Claim | SEBI Clarification |
|---|---|
| SEBI has banned all ODI issuance | False – Only ODIs referencing derivatives are barred |
| FPIs cannot issue ODIs anymore | False – Cash-backed ODIs remain fully permissible |
| Derivative-linked ODI exposure is still allowed | False – SEBI has explicitly prohibited it |
What This Means for Market Participants
For FPIs
- No disruption to existing structures based on cash market exposure
- Time to audit internal ODI processes to ensure no synthetic or derivative linkages remain
- Ensure ODI-specific registration compliance and appropriate naming conventions
For Regulators and the Broader Market
- Reinforces SEBI’s focus on market transparency and source-of-funds traceability
- Minimizes the risk of unregulated capital inflows through complex synthetic routes
- Encourages a level playing field for registered, long-term investors
Conclusion: No Ban, Just Boundaries
SEBI’s latest clarification reflects regulatory precision, not prohibition. By banning only derivative-based ODI structures, the regulator is drawing a clean line between genuine investment exposure and synthetic speculation.
The takeaway is simple: ODIs are still very much permitted—as long as they’re anchored in real, cash-backed securities.
This ensures that India’s capital markets stay open to foreign capital—but on terms that protect transparency, integrity, and long-term stability.