RBI removes cap on investments in corporate bonds by FPIs

By Abhirup Ghosh (abhirup@vinodkothari.com), (finserv@vinodkothari.com)

The Reserve Bank of India (RBI) in its Sixth Bi-monthly Monetary Policy Statement for 2018-19 dated February 07, 2019[1] had declared that for the purpose of widening the spectrum of investors in the Indian corporate bond market, it will remove the cap on investment to be made by FPIs on corporate bonds. In furtherance to the declaration, the RBI on 15^th February, 2019[2] issued a notification giving effect to the proposal.

Before we understand what the impact of the notification will be, let us recapitulate what the restrictions were.

RBI’s notification imposing a cap on investments

The cap on investment by FPIs on corporate bonds was imposed vide RBI’s notification dated 15^th June, 2018[3]. Besides several other requirements, the notification imposed multiple caps on investments in corporate bonds and they were:

1. Cap on investment in single issue corporate bonds: The maximum investment an FPI can make in a single issue of corporate bonds is 50% of the total issue size.
2. Cap on investment in corporate bonds issued by a single issuer: The maximum investments by an FPI in corporate bonds issued by a single issuer or its group entities cannot exceed 20% of the corporate bond portfolio of the FPI.

RBI’s notification withdrawing the cap on investments

The RBI notification dated 15^th Feb., 2019 makes an amendment to its earlier notification dated 15^th June, 2018. The amendment is withdrawal of imposition of cap on investment in corporate bonds issued by a single issuer. Henceforth, FPIs the restriction on concentration of more than 20% on a single issuer shall not apply.

This notification comes a breather for the Indian bond market, which is otherwise struggling to keep up its pace with the bond markets of other developing and developed economies. The erstwhile provision was a stringent one as the restriction was not only investment in the bonds issued by a single issuer but also on the issuances by its group companies.

The impact on the restriction was not only restricted to corporate bonds, as one school of thought extended the intent of the restriction to include securitised debt instruments as well within the purview of the notification. Though securitised debt instruments differs from corporate bonds[4], however, the apprehensions of the same getting covered with the notification caused a lot of commotion within the Indian securitisation industry. The latest amendment notification however puts to rest all such apprehensions.

Having said the above, the other provisions of the earlier notification, including the cap on the maximum investment in a single issue of corporate bonds will continue to apply.

The change shall come into force with immediate effect.

[1] https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=46235

[2] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11475&Mode=0

[3] https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11303&Mode=0

[4] Read our detailed article on this issue at: http://vinodkothari.com/2018/06/investment-by-fpis-in-securitised-debt-instruments/