What are "Offshore Derivative Instruments (ODIs)"? Explained!

24 Jun 2025 GS 3 Economy
    Live Views: Loading...

Offshore Derivative Instruments (ODIs)

  • ODIs are financial instruments issued by registered Foreign Portfolio Investors (FPIs) to foreign investors who wish to invest in Indian securities without directly registering with SEBI.

  • ODIs derive their value from underlying Indian assets (like shares or derivatives).

  • ODIs are offshore contracts, outside Indian regulation, and legally governed abroad.

Example:

  • A foreign investor in London wants to invest in TCS without registering with SEBI.

  • They approach a SEBI-registered FPI (like Goldman Sachs), which buys TCS shares or futures in India and issues an ODI abroad.

  • The foreign investor earns profits/losses linked to TCS, without owning it directly.

What is Hedging in ODI Context?

  • FPIs used derivatives like futures/options in India to hedge the risk on ODI-based investments.

  • Example: If the ODI is linked to a TCS futures contract, the FPI might buy a put option to protect against price falls.

SEBI’s New Rules (Circular dated 17 Dec 2024):

Key Restrictions:

  1. ODIs based on derivatives are banned.

  2. ODIs must be linked only to actual stocks (cash market).

  3. No derivative-based hedging for ODI-linked exposures.

  4. All ODIs must be fully hedged on a one-to-one basis with the same underlying securities.

New Compliance Norms:

  1. FPIs issuing ODIs must register separately, using the same PAN with suffix “ODI”.

  2. No proprietary investments allowed in the ODI account.

  3. Disclosure required if:

    • ODI holdings exceed 50% in one corporate group, or

    • Overall holdings exceed ₹25,000 crore.

  4. FPIs with existing derivative-based ODIs get 1 year (till Dec 16, 2025) to comply.

Why SEBI Introduced This?

  • To plug regulatory loopholes and prevent opaque speculative flows.

  • To ensure greater transparency about foreign investors’ identities and exposures.

  • To make Indian markets more stable and less vulnerable to offshore manipulations.

Impacts of the New Rules

🟠 Positive Impacts:

  • Builds trust and transparency in markets.

  • Encourages long-term, stable investments.

  • Reduces sudden sell-offs and speculative volatility.

🔵 Negative/Short-term Effects:

  • May reduce FPI participation due to loss of flexibility.

  • Lower liquidity and volume in derivatives market.

  • Rupee may weaken if FPIs exit and repatriate funds.

  • Could impact large-cap stocks with heavy FPI interest (like Reliance, HDFC Bank, TCS).




← Back to list