What’s going on here?
India’s SEBI is getting tough on offshore derivatives, proposing that these trades must be backed by cash equity or debt.
What does this mean?
The Securities and Exchange Board of India (SEBI) is aiming to stabilize its markets by introducing proposals to limit offshore derivative instruments (ODIs). Currently, ODIs contribute significantly to market volatility due to their leverage in overseas markets, an area where SEBI has little oversight. New rules would require ODIs to be backed by actual cash equity or debt, rather than other derivatives. Investors holding over 50% of ODIs within an Indian corporate group would also face new disclosure requirements. These measures follow a year-old mandate from SEBI for offshore funds to reveal ultimate investors if they concentrated their holdings within Indian groups. Resistance from major ODI holders to the prior norms had posed a challenge, but this proposal could tighten the reins effectively.
Why should I care?
For markets: Aiming for stability.
If implemented, the proposals could lead to a sizable unwinding of positions. Four offshore funds holding futures worth 30.75 billion rupees ($366 million) in Indian securities would need to liquidate within a year. This shift could initially shake market dynamics but is ultimately geared towards reducing volatility and enhancing transparency. With ODIs accounting for around $16 billion, or nearly 2% of India’s total foreign investments, these changes could significantly influence market behavior and investor confidence in the short term.
The bigger picture: Transparency is key.
India has been on a regulatory tightening spree for derivative trades, raising taxes and issuing warnings about retail activity risks. The increased scrutiny on offshore derivatives aligns with these broader efforts to shore up market integrity. By demanding clearer disclosures and limiting the leverage and risk exposure of ODIs, SEBI aims to ensure a healthier, more transparent investment environment. These steps also mirror global trends where regulatory bodies are pushing for greater transparency and tighter control over complex financial instruments.