Sebi simplifies FII disclosures on participatory notes

The capital market regulator Sebi, has relaxed the disclosure norms for foreign institutional investors (FIIs) who issue overseas derivative instruments (ODIs). FIIs have to give a periodic disclosure to Sebi on the ODIs issued by them.

This format contains a declaration too, which till now read: “We undertake that we/associates/clients have not issued / subscribed / purchased any of the offshore derivative instruments directly or indirectly to/from Indian residents/NRIs/PIOs/OCBs during the Statement Period.” This has been amended to: “We undertake that we/ our associates have not issued/ subscribed/ purchased any of the offshore derivative instruments directly to/ from Non Resident Indians/ Indian Residents.”

So what has changed?
The declaration is restricted to the FII and their associates and not their clients. This let’s FIIs off the hook if their clients enter into any transactions without their knowledge. The second change is that Persons of Indian Origin and Overseas Commercial Bodies have been removed from the purview of this declaration. And, the third is that ‘indrectly’ has been removed. The change coincides with the issuance of the Securities Apellate Tribunal (SAT) order in the Goldman Sachs’ case.

SAT ruled in favour of Goldman, overturning the Rs 1 crore penalty levied by Sebi. The SAT order states the point it was considering was whether Sebi could ask FIIs to give an undertaking as given above, in the case of persons who have not been barred from entering into such transactions. Since PIOs and OCBs are not barred from entering into such transactions, Sebi seems to have amended the circular. The SAT order says that the regulations bar them from operating as a FII or as a sub-account.

In October 2007, Sebi had proposed new norms for ensuring that ODIs are not misused, especially for routing unaccounted money. The anonymity granted by this instrument has made regulators nervous. Read more here and here. In its current circular, Sebi has also asked FIIs to include a statement in their monthly ODI report stating their assets under custody in the Indian securities market and how much of that is contributed by ODI.

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