Sebi to end P-Note secrecy with mandatory NSDL registration for ODI investors

Sebi Set to End Secrecy Surrounding Offshore Derivative Instruments in Indian Stocks

Secrecy surrounding offshore derivative instruments (ODIs), or participatory notes, used by anonymous foreign investors in Indian stocks is set to end. New rules will require ODI subscribers to register with NSDL and provide a Legal Entity Identifier (LEI). This move aims to enhance transparency and reduce hidden risks in financial transactions, making it easier to identify foreign investors.

What are Offshore Derivative Instruments (ODIs)?

ODIs are issued by foreign portfolio investors (FPIs) against underlying equity or bonds to overseas investors who bet on Indian securities without registering themselves with the Securities & Exchange Board of India (Sebi). Typically, such investors prefer anonymity or are unwilling to trade directly.

New Rules: A Step Towards Transparency

• ODIs can only be issued to foreign ODI subscribers who are registered in the portal of NSDL, India's largest depository.
• ODI subscribers will have to share their LEI - an alphanumeric code that uniquely identifies a legal entity in financial transactions.
• The LEI will help promote transparency on an instrument that was often suspected to have been used for surrogate ownerships in companies.

Granular Disclosure Norms for FPIs and ODI Subscribers

The new rules will also extend granular disclosure norms for FPIs to ODI subscribers. This means that ODI subscribers will have to reveal the identities of the last natural persons behind every investor (including ODI holders) in funds with outsized India exposure to equities.

Automated Daily Reporting and Breach Notifications

The new rules will also introduce automated daily reporting and breach notifications to quickly spot excessive exposures or concentration risks, reducing the chance of market manipulation or systemic risk.

Expert Views

Rajesh H Gandhi, partner at Deloitte India, said, "The SOP closes the loop on application of granular KYC requirements which have so far been applied to FPIs and now extended to the P-Note route as well. This is in the spirit of the law and ensures the P-Note route is not misused for circumventing the granular disclosure requirements."

Richie Sancheti, founder of the law firm Richie Sancheti Associates, said, "Automated daily reporting and breach notifications allow Sebi and depositories to quickly spot excessive exposures or concentration risks, reducing the chance of market manipulation or systemic risk. Non-compliance would lead to swift consequences, including trading restrictions and forced liquidation."

Timeline for Implementation

• An FPI which breaches the 50% concentration on a single corporate (or group) as on November 17, 2025 (or sometime in December), must bring down the exposure by February 15, 2025.
• If it continues to breach the rule as on January 30, 2026, it cannot add new positions in the stock (or, group) from January 31 and must realign the portfolio by February 15, 2026.
• The additional disclosure obligation will be effective from February 16, 2026.