The Hindu Business Line : Confusion persists over offshore derivative instruments

Mumbai, July 22 Even as SEBI has appealed in Supreme Court against the SAT order in the Goldman Sachs case, there is still a lot of confusion among FII circles and their consultants on whether Offshore Derivative Instruments (ODIs) can be issued to Overseas Corporate Bodies (OCBs).

OCBs are firms incorporated abroad and owned predominantly (at least 60 per cent) by NRIs.

Master circular

SEBI’s May 2008 amendments to the FII regulations made it possible for overseas corporate bodies to register as FIIs and sub-accounts. Legal advisors say they are not sure whether SEBI has taken into account RBI’s ban on OCBs as an investor class altogether.

An RBI master circular on foreign investments, which is as recent as June 13 this year, only maintains this: “With effect from November 29, 2001, OCBs are not permitted to invest under the PIS (portfolio investment scheme) in India. Further, the OCBs, which have already made investments under the Portfolio Investment Scheme, are allowed to continue holding such shares/convertible debentures till such time these are sold on the stock exchange. OCBs have been de-recognised as a class of investors in India with effect from September 16, 2003.”

This only provides for transitional permission to OCBs to wind down their existing holdings.

Fresh investments

Even the fresh investments allowed to some OCBs are only allowed for foreign direct investment: “Erstwhile OCBs, who have converted themselves into companies incorporated outside India, can make fresh investments in India under the FDI scheme, provided they are not under the adverse notice of the Reserve Bank/SEBI,” says the master circular.

Goldman Sachs had been fined Rs 1 crore by SEBI for not furnishing an undertaking in a SEBI-prescribed format which reads: “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.”

SAT had dismissed the order saying there was nothing in the SEBI Act or in its FII regulations, which debars FIIs or their sub accounts from dealing in ODIs with Indian residents/NRIs, PIOs and OCBs. Therefore, the undertaking in the prescribed format was not necessary. SEBI has now gone to the Supreme Court in appeal against this order.

The SAT order, however, made no reference to the RBI ban on OCBs, said legal experts; neither do SEBI regulations on FIIs refer to any RBI regulation. “It could be only a matter of time before the issue is raised by someone,” said an official with a law firm that deals with FIIs.

FII Regulations

There is one technical point through which OCBs could enter the market, he said. “SEBI’s amendments to the FII regulations have dropped a provision in Regulation 13 barring OCBs/NRIs from registering as FIIs and sub-accounts. Once OCBs are registered as FIIs and sub accounts, then perhaps they are no longer OCBs and the RBI ban would not apply,” said a legal expert.

However, this is still open to challenge because in essence they still fit the RBI definition of OCB, he added.

In view of this, SEBI’s new regulations permitting OCBs to register as FIIs and sub-accounts is confusing, say legal experts. But, should a situation arise, which requires this anomaly to be explained, then it is likely that RBI’s regulations will prevail, they said. “If there are two sets of regulations and one says ‘no,’ the ‘no’ will always prevail over the ‘yes’,” said the head of a brokerage firm.

Related Stories:
‘Disclose offshore derivative instruments activities’
SAT sets aside SEBI order on Goldman

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