Mumbai: The Singapore Exchange (SGX) has emerged as the leading platform for issuance of offshore derivative instruments (ODI) betting on Indian stocks since the regulatory crackdown on participatory notes (p-notes) in the country. P-notes is a form of offshore derivative instrument. Some of the leading foreign portfolio investors (FPIs) based out of Singapore are issuing hybrid instruments such as ODI swaps and options, with Indian stocks as the underlying, through the over-the-counter (OTC) platform of SGX.
In late 2017, Securities and Exchange Board of India had banned p-notes from taking any derivative positions in Indian markets for purposes other than hedging. ODIs such as p-notes are used by foreign investors who want to trade in a country without having to register with that government or regulators. These instruments are issued by a broker who is already registered in the country. For instance, in India, leading ODI issuers include Citi, Deutsche Bank, which are registered FPIs with Sebi. FPIs and their legal advisors who spoke to ET said issuing of such contracts through SGX platform was not in violation of domestic laws. Typically, these FPIs are issuing OTC contracts to investors through SGX platform and are hedging the risk either through derivatives listed on SGX or through cash market purchases in India, depending on the type of strategy involved.
“The issuance and risk management are being handled from Singapore, hence the provisions of Sebi p-note regulations would not apply for these transactions,” said the CIO of a Singapore-based FPI. “The trend is not just limited to Indian securities; we offer such instruments for other Asian markets including Hong Kong and South Korea.”
There is also a technical lacunae in the Sebi’s p-note regulations, which is prompting such practices, say lawyers. If an FPI issues ODI to its client and takes up the same exposure directly in India market, then such a contract between the FPI and its client would be considered a p-note. However, if the FPI is issuing the contract and is not directly buying the identical amount of shares or contracts onshore, it cannot come under Sebi’s jurisdiction.
“This seems to be a way around to structure certain overseas trades which are no more possible to be carried out with an Indian derivative as underlying due to Sebi p-note restrictions,” said Tejesh Chitlangi, IC Universal Legal.
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