Over the last few years, SEBI has been adopting various strategies to regulate the use of offshore derivative instruments (ODIs) such as participatory notes that enable foreign investors to participate in the Indian markets without actually owning the underlying securities. The strategies include restricting the use of ODIs, and also requiring the application of know-your-client norms (KYC) by foreign institutional investors (FIIs) who issue the ODIs against underlying Indian securities they hold.
In this background, Tejesh Chitlangi and Sandeep Parekh have an interesting column in the Financial Express that examines some of the key issues involved in regulating ODIs. Although SEBI’s approach has intensified over the years, there are a number of issues in concept and practice that still need to be addressed, as they note. Matters get complicated further because ODIs are issued outside India thereby testing the extraterritorial reach of SEBI’s powers of regulation and enforcement.