SEBI bans P-Notes on derivatives

Palak Shah Mumbai | Updated on January 27, 2018

P-Note issuances on derivatives where it is done for hedging purpose and underlying shares are held by FPIs allowed

In a major move, market regulator SEBI on Friday banned FPIs from issuing offshore derivative instruments or P-Notes for derivatives as underlying.

The SEBI in a late evening circular said that exception will be made for P-Note issuances on derivatives only where it is done for hedging purpose and underlying shares are held by FPIs.

"Where the said underlying derivatives position are not for purpose of hedging the equity shares held by it, the ODI issuing FPI has to liquidate such ODIs latest by the date of maturity of the ODI instrument or by December 31, 2020," SEBI said.

ODI issuing FPIs should endeavour to liquidate such ODI instruments prior to said timeline, SEBI further said.

FPI P-Note holding in derivative segment stood at over Rs 40,000 crore and the SEBI circular could have a sharp reaction in the market, experts said.

In the case of issuance of fresh ODIs with derivatives as underlying, a certificate has to be issued by the compliance officer (or 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 shall be submitted along with the monthly ODI reports, SEBI said.

"It is 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," Sebi said.

Published on July 08, 2017

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