On July 7, 2017, the Securities and Exchange Board of India (‘SEBI’) issued a circular on guidelines for issuance of offshore derivative instruments (‘ODIs’), with derivatives as underlying, by the ODI issuing foreign portfolio investors (‘FPI’) (‘ODI Guidelines’). As per the SEBI (Foreign Portfolio Investors) Regulations, 2014 (‘FPI Regulations’), FPIs are required to comply with certain conditions for issuance of ODIs. Per the ODI Guidelines, FPIs issuing ODIs are required to comply with the following from July 7, 2017:

i. The ODI issuing FPIs will not be allowed to issue ODIs with derivatives as underlying, with the exception of those derivative positions that are taken by the ODI issuing FPIs for hedging the equity shares held by them, on a one-to-one basis;

ii. If there are existing ODIs issued by FPIs where the said underlying derivatives position are not for the purpose of hedging the equity shares held by it, the ODI issuing FPIs are required to liquidate such ODIs latest by the earlier of the date of maturity of the ODI instrument or by December 31, 2020. However, such FPIs must endeavor to liquidate such ODI instruments prior to the said timeline;

iii. If fresh ODIs are issued with derivatives as underlying, a certificate would need to be issued by the compliance officer (or its equivalent) of the ODI issuing FPI, certifying that the derivatives position, on which the ODI is being issued, is only for hedging the equity shares held by it, on a one-to-one basis. The said certificate will be submitted alongwith the monthly ODI reports; and

iv. It has been clarified that the term ‘hedging of equity shares’ means taking a one-to-one position in only those derivatives which have the same underlying as the equity share.