Offshore derivative instruments
Also written ODI · ODIs · Offshore derivative instrument · Offshore Derivative Instruments (ODIs)
Instruments issued by an FPI that reference Indian securities; SEBI bars ODIs referencing derivatives and allows onshore derivative hedging only via a separate Category I registration, within limits.
In plain language
A foreign investor can get exposure to Indian shares without holding them itself, by subscribing to an instrument issued by a registered FPI — an instrument that references Indian securities. That instrument is an offshore derivative instrument (ODI), and the FPI that sells it is the ODI issuer.
The issuer then usually protects itself by holding or hedging the Indian exposure in India. That is where SEBI's rules bite: they decide what an ODI may reference, how the issuer may hedge it onshore, and when a product counts as an ODI at all.
The workbook sets these out from SEBI's master circular of 30 May 2024.
How it works
The prohibitions.
- FPIs shall not issue ODIs referencing derivatives.
- No FPI may hedge its ODIs with derivative positions on Indian stock exchanges — except as below.
- Synthetic short activities — ODIs that have the effect of a short sale in Indian securities — remain prohibited.
- No fresh derivative positions not complying with these requirements are allowed.
The exceptions — only through a separate FPI registration of an ODI-issuing FPI under Category I:
| Permitted | Limit |
|---|---|
| Derivative positions on Indian exchanges to hedge equity shares held in India | One to one basis |
| Hedging ODIs referencing equity shares with derivative positions on Indian exchanges | 5% of market-wide position limit for single stock derivatives; for stock index derivatives, the higher of Rs 100 crore or 5% of open interest |
| An ODI issuer hedging only by holding securities (other than derivatives) in India | Cannot take proprietary derivative positions through the same registration; must segregate ODI and proprietary derivative investments through separate FPI registrations |
Is it an ODI?
- For trades on non-proprietary indices (the workbook's examples: MSCI World, MSCI EM Asia), the threshold is 20%: where the Indian component is less than 20% of the index, the trade is not an ODI, even if hedged onshore.
- Trades on custom baskets, if hedged onshore, are always ODIs, whatever the Indian percentage.
Know the subscriber. The ODI issuer must collect documents and information enough to satisfy itself about the relationship between the ODI subscriber and its investment manager from a FATF member country. The investment restrictions of Regulation 20(7) apply to ODI subscribers too.
A worked example
Illustrative figures. An ODI-issuing FPI with a separate Category I registration reviews its book.
1. Single-stock hedge. It has issued ODIs referencing shares of a bank whose single-stock derivatives have a market-wide position limit of 12 crore shares.
Maximum derivative hedge = 5% × 12 crore = 60 lakh shares
2. Index hedge. It wants to hedge index-referencing exposure with Nifty futures.
If open interest = Rs 1,600 crore → 5% = Rs 80 crore → limit = higher of Rs 100 crore and Rs 80 crore = Rs 100 crore
If open interest = Rs 3,000 crore → 5% = Rs 150 crore → limit = Rs 150 crore
3. Is it an ODI?
| Product | Indian weight | Hedged onshore? | ODI? |
|---|---|---|---|
| Swap on a broad emerging-Asia index | 17% | Yes | No — below 20% |
| Swap on the same index after rebalancing | 22% | Yes | Yes — 20% or more |
| Swap on a custom basket of 30 Asian stocks | 6% | Yes | Yes — custom basket hedged onshore |
4. Refused. A client asks for an ODI referencing Nifty options. That references a derivative, so the FPI cannot issue it. Another asks for an ODI that has the effect of a short sale in an Indian stock — a synthetic short, also prohibited.
Why NISM asks about it
Chapter 11.6 (Conditions for Issuance of Offshore Derivative Instruments), from SEBI's 30 May 2024 master circular. The section is almost entirely numbers and conditions: 5% of MWPL, higher of Rs 100 crore or 5% of open interest, 20% index materiality, custom baskets always ODIs, Category I separate registration, and the synthetic short prohibition.
Common exam traps
- ODIs cannot reference derivatives. They may reference equity shares.
- The index threshold is 20%: below 20% Indian weight is not an ODI; a custom basket hedged onshore is always one.
- Stock index derivative limit is the higher of Rs 100 crore or 5% of open interest — not the lower.
- Single-stock hedging limit is 5% of the market-wide position limit, not 5% of the company's shares.
- The exceptions need a separate Category I ODI-issuing registration, and an issuer that hedges only with cash securities must keep proprietary derivatives in a different registration.
- Synthetic shorts remain prohibited, and Regulation 20(7) restrictions apply to ODI subscribers as well.
Where this is taught
Free preparation for NISM Series XIX-ERelated terms
- HedgingTaking a derivative position that moves opposite to an exposure you already have, so gains on one offset losses on the other and the future rate is locked in at a known level.
- Market Wide Position LimitThe ceiling on total open interest in a stock's futures and options across exchanges — 20% of non-promoter shares. Above 95% no fresh positions are allowed until it falls to 80%.
- FATFThe intergovernmental body founded in 1989 that writes the global AML/CFT standards — the 40 Recommendations plus IX Special Recommendations — and grey-lists or black-lists countries that fail them.
- Category-I FPIThe first of the two classes of Foreign Portfolio Investor under SEBI's 2019 FPI Regulations: governments and related investors, pension and university funds, and appropriately regulated entities and funds.
- DerivativeA contract whose value is derived from the value of something else — the underlying — rather than from anything the contract itself owns or produces.
- Open interestThe total number of derivative contracts outstanding and not yet settled in an underlying — counted on one side only, because every long is matched by a short.
- Portfolio Investment SchemeThe FEMA route through which SEBI-registered FPIs, and NRIs permitted by a designated AD Category-I bank branch, buy shares, convertible debentures and warrants of listed Indian companies within set limits.