SEBI guidelines on Offshore Derivative Instruments (Participatory Notes)

The SEBI Board has on 25th October 2007 has taken the following decisions on on Offshore Derivative Instruments (Participatory Notes) :

1. It has already been clarified by SEBI that there is no proposed bar on ODI contracts, expiring this month or in the following months, being renewed, provided the renewal does not go beyond 18 months. It was further made clear that this proposal did not in any manner seek to restrict renewal or rollover of Indian Exchange Traded Derivative Contracts by the FIIs.

FIIs/sub-accounts are free to invest in derivatives traded on recognized stock exchanges.

The Board decided that starting from the date of implementation of this proposal, they can not issue P-Notes that are based on such derivatives.

2. It was proposed that “further issuance of ODIs by the sub-accounts of FIIs will be discontinued with immediate effect. They will be required to wind up the current position over 18 months, during which period SEBI will review the position from time to time.”

The Board decided that from the date of implementation of the proposal, no sub-account can issue fresh ODIs. Existing ODI issuing sub-accounts have to ensure that they wind up all their ODIs within 18 months of implementation of the proposal.

Taking note of the transition being made by the sub-accounts currently issuing participatory notes, into FIIs, and in order to ensure implementation of the proposals in a non-disruptive manner, the Board has decided that that these applicants be treated as if they were FIIs as on the date decided for calculation of the AUC for the above proposals.

3. It was proposed that “The FIIs who are currently issuing ODIs with notional value of PNs outstanding (excluding derivatives) as a percentage of their AUC in India of less than 40% shall be allowed to issue further ODIs only at the incremental rate of 5% of their AUC in India. “

The Board confirmed the proposal with the understanding that 5% incremental issuance allowed to such FIIs would be applicable on an annual basis, till such time that the percentage reaches 40%, after which the entity will abide by the proposal applicable to entities above the 40% limit.

4. It was proposed that “Those FIIs with notional value of PNs outstanding (excluding derivatives) as a percentage of their AUC in India of more than 40% shall issue PNs only against cancellation / redemption / closing out of the existing PNs of at least equivalent amount.” The Board confirmed the proposal.

5. The Board decided that the effective date for calculation of the AUC for the purpose of determining the notional value of PNs issued as a percentage of AUC, for the above proposals shall be September 30, 2007. The proposal will however take effect after close of trading hours on October 25, 2007.

6. The SEBI board has agreed to the following changes to the registration criteria

a. Broad-based criteria

The “broad-based” criteria shall now be modified to include entities having at least 20 investors, no single investor holding more than 49% (instead of 10% at present).

b. Track record of the applicant

Track record of individual fund managers will be considered for the purpose of ascertaining the track record of a newly set up fund, subject to such fund manager providing its disciplinary track record details.

c. Issuance of ODIs/PNs would be limited to only “regulated” entities and not “registered” entities.

d. FII and sub-account registrations will be perpetual, subject to payment of fees.

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