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Business News/ Market / Stock-market-news/  FPIs will have to combine stocks held via ODIs with their own holdings
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FPIs will have to combine stocks held via ODIs with their own holdings

The new rule may result in many FPIs breaching the 10% ownership limit in Indian companies set by the government

The notional value of ODIs on equity was pegged at `1.64 trillion in October, according to Sebi data. Photo: Abhijit Bhatlekar/MintPremium
The notional value of ODIs on equity was pegged at `1.64 trillion in October, according to Sebi data. Photo: Abhijit Bhatlekar/Mint

Mumbai: Foreign portfolio investors (FPIs) will have to club stocks owned indirectly through offshore derivative instruments (ODI) issued by them to clients with their own holdings, according to new norms issued by the Indian capital markets regulator.

The new rule may result in many FPIs breaching the 10% ownership limit in Indian companies set by the government, potentially resulting in them selling off some of their holding that exceeds the limit. Holdings of more than 10% in a company by a single entity is considered foreign direct investment by the government.

Lawyers specializing in securities market regulations say that ODI subscribers can also move from one FPI to another, depending on the overall ownership of a stock by a particular FPI, so that they can continue to remain invested in a firm.

ODIs, which predominantly comprise of participatory notes (PNs), are products issued by FPIs registered with the Securities and Exchange Board of India (Sebi) to overseas entities that want to invest in Indian markets without registering with the capital markets regulator.

“The move is aimed to curb black money and round-tripping of Indian investments. It will ensure that promoters of Indian firms who are currently able to hold stakes in their own companies through ODIs issued in unregulated jurisdictions will now be forced to wind up their positions," said U.R. Bhat, managing director of Dalton Capital Advisors (India) Pvt. Ltd. “For genuine FPIs, there may not be much of a problem, but it is now impossible for investors holding ODIs issued in unregulated or poorly-regulated jurisdictions to park money in India. At present, the ODI holdings through unregulated jurisdictions is significant in India, so there could be a considerable sell-off in Indian markets because of the recent move."

The notional value of ODIs on equity was pegged at 1.64 trillion in October, according to Sebi data. This is 7.55% of the total assets of 21.71 trillion held by FPIs.

“Where an investor has investments as FPI and also holds positions as an ODI subscriber, these investment restrictions shall apply on the aggregate of FPI investments and ODI positions held in the underlying Indian company. In other words, the investment as FPI and positions held as ODI subscriber will be clubbed together with reference to the said investment restrictions," said Sebi, in a circular issued on Monday. The clarification has been issued in the context of Regulation 21(7) of Sebi (Foreign Portfolio Investor) Regulations, 2014, which lays down that the “purchase of equity shares of each company by a single foreign portfolio investor or an investor group shall be below ten percent of the total issued capital of the company".

Sandeep Parekh, founder of Finsec Law Advisors, said there will be an impact on the holdings of FPIs. “Certain ODI subscribers would move from one FPI to another over a period of time," he said.

The Sebi (Foreign Portfolio Investor) Regulations, 2014, which were notified in January, only stated that in case the same set of ultimate beneficial owners invested through multiple entities, then such entities would be treated as part of the same investor group and the investment limits of all such entities would be clubbed at the investment limit as applicable to a single FPI.

Lawyers say that the clarification has created a level-playing field between ODI and non-ODI investors, as earlier norms said that an FPI had to be compliant with a number of stringent registration and residential requirements while the norms were easier for an ODI.

“That arbitrage will go, which is a positive development. Also, the alignment of economic interest and indirect ownership by foreign investors is more logical and bring more clarity for shareholders and regulators," said Siddharth Shah, a partner at law firm Khaitan and Co.

The latest Sebi circular says these investment restrictions will apply to ODI subscribers also as two or more ODI subscribers having common beneficial owner will be considered a single ODI subscriber.

Shah said many entities may have to bring down their positions via ODIs to reduce their collective holding to 10% or lower, but there would be no direct impact on listed firms as very few have foreign ownership only in the form of ODIs. An email seeking comment from Sebi remained unanswered till the time of going to press.

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Published: 26 Nov 2014, 12:35 AM IST
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