FPIs ask Sebi to clear haze around p-notes circular

Foreign portfolio investors (FPIs) are seeking clarity on the circular on participatory notes (p-notes) or offshore derivative instruments (ODIs), issued by the Securities and Exchange Board of India (Sebi) in July.

Investors are unclear whether the hedging position needs to be looked at, at the issuer level or at the subscriber level, and whether the derivatives positions can be taken against equity investments indirectly through foreign currency convertible bonds (FCCBs) or American depository receipts/global depository receipts (ADRs/GDRs).

FPIs have told the regulator it would be difficult for issuers to discern between speculative and hedging positions of individual investors, and to ascertain the exact number of open positions held by investors. This will especially be the case if the investors deal with multiple p-notes issuers.

Sebi is expected to come out with clarifications on some of these issues.

“The language of the circular seems to suggest that it is at the issuer level but the intent appears to be otherwise,” said a person on condition of anonymity.

The regulator needs to clarify whether the issuer needed to issue ODI on equity shares to the same subscriber who is looking to subscribe to ODIs on derivatives, the source said: “Can the issuer issue an ODI against derivative to a subscriber who already holds an equity position through the FPI route or an ADR/GDR under the FDI (foreign direct investment) route?.

ADR and GDRs are depository receipts traded in the local stock exchange but represent a security issued by a foreign public listed company.

Sebi had issued a circular in July banning p-notes holders from taking naked exposure to the derivatives market. It also said all existing positions would have to be squared off by the end of 2020 or date of maturity of the instrument, whichever was earlier.

Only those derivative positions that are taken by an ODI issuing FPIs for hedging the equity shares held by it, on a one-to-one basis, are allowed now. A one-to-one position means derivatives which have the same underlying as the equity share. ODIs against a basket of shares such as the Nifty or Sensex are ruled out. Even those against a samesector index are rule out. Practically, only players who want to engage in arbitrage would buy equity on the spot and sell the derivative.

The Business Standard, New Delhi, 09th August 2017