Regulation S

Q. With reference to ‘Regulation S’, consider the following statements:

1. They are instruments permitting foreign investors to invest in India’s securities markets without getting registered with the SEBI.

2. The regulation encourages foreign investors to buy financial instruments and increases liquidity of financial markets.

Which of the above statements is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Answer: (b)

Explanation:

Statement 1 is incorrect:

• • Offshore Derivative Instruments (ODIs), also known as Participatory notes (p-notes) are instruments used by the foreign investors to invest in India’s securities markets without getting registered with the SEBI. Participatory notes are issued by FPIs registered with SEBI to overseas/ foreign investors. These FPIs make investments on behalf of the overseas investors.

• • On the other hand, Regulation S is a regulation of the Securities and Exchange Commission (SEC) of the United States of America which provides that offers and sales of securities that occur outside of the United States are exempt from the registration requirements of Section 5 of the Securities Act of 1933.

Statement 2 is correct: Regulation S permits these types of transactions to occur without SEC registration. To issuers and other distributors of securities, raising capital without registration means obtaining funding more quickly, more discreetly and less expensively than would be the case if registration were required. This encourages foreign investors to buy US financial assets in order to increase the liquidity of US markets.

PYQ 2019: Which of the following is issued by registered foreign portfolio investors to overseas investors who want to be part of the Indian stock market without registering themselves directly?

(a) Certificate of Deposit

(b) Commercial Paper

(c) Promissory Note

(d) Participatory Note

Answer: (d)