The Securities and Exchange Board of India (Sebi) has put on hold the implementation of the diktat requiring custodians to monitor foreign holding in depository receipts (DRs).

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The new norms, which became applicable from April 1 and were postponed by a month, require designated depository participants or custodians to collect, monitor and report information every month on offshore derivatives instruments (ODIs) and DRs held by foreign portfolio investors (FPIs) and those foreign entities which belong to the investor group of the FPIs.

“In view of the representation from market participants, Sebi has advised the implementation of the Sebi circular dated October 1, 2020, may be kept in abeyance till further instructions,” a note sent by a depository to the custodians observed.

The custodians as well as industry body Asia Securities Industry and Financial Markets Association (Asifma), a lobby group for foreign portfolio investors (FPIs), had requested the regulator to postpone the norms, citing legal hurdles and challenges in implementing the circular in its present form.

The industry body, in a recent letter to the regulator, had said that investors in the US, UK and the European Union are in the process of obtaining legal advice on the circular.

It had also sought an interaction with Sebi in order to thrash out a solution.

Asifma had told Sebi that it is engaging external counsel to seek advice on whether the data relating to holdings in DRs and ODIs outside India can be obtained on legal and regulatory grounds, and the aspects that need to be kept in mind while collating the required information.

“The detailed work of aggregating data across multiple legal entities in a new way is operationally challenging and work on scoping and resourcing this is in early stages, and dependent on the legal advice and dialogue with Sebi,” the recent letter to Sebi said.

In an earlier letter, Asifma had pointed out that a similar structure for reporting ODIs and DRs was not applicable in any other jurisdiction and the association was not aware of any publicly available DR holdings data that could be connected to institutional reference data systems.

It had also pointed to concerns on data security. “The information that is sought from investors is highly sensitive and it would present significant data security regulatory challenges to share such information over email. Cyber security threats, particularly when data is transferred between market participants, are heightened and require greater encryption,” it had said.

Separately, custodians have also highlighted confidentiality concerns while disclosing information to custodians through nodal FPIs, especially when there is no account based relationship between the FPIs part of the investor group and the custodian.

To get around this problem, custodians want the depositories to develop a centralised web portal to facilitate the nodal FPI or FPI to report the underlying Indian security represented by the ODI or DR directly to the depository.

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