Shaifali Sharma | Vinod Kothari and Company
In March, 2019, the RBI with an objective to attract long-term and stable FPI investments into debt markets in India introduced a scheme called the ‘Voluntary Retention Route’ (VRR). Investments through this route are in addition to the FPI General Investment limits, provided FPIs voluntarily commit to retain a minimum of 75% of its allocated investments (called the Committed Portfolio Size or CPS) for a minimum period of 3 years (retention period).However, such 75% of CPS shall be invested within 3 months from the date of allotment of investment limits. Recognizing the disruption posed by the COVID-19 pandemic, RBI vide circular dated May 22, 2020, has granted additional 3-months relaxation to FPIs for making the required investments. The circular further addresses the questions as to which all FPIs are covered under this relaxation and how the retention period will be determined.
This article intends to discuss the features of the VRR scheme and the implications of RBI’s circular in brief.
What is ‘Voluntary Retention Route’?
RBI, to motivate long term investments in Indian debt markets, launched a new channel of investment for FPIs on March 01, 2019 (subsequently the scheme was amended on May 24, 2019), free from the macro-prudential and other regulatory norms applicable to FPI investment in debt markets and providing operational flexibility to manage investments by FPIs. Under this route, FPIs voluntarily commit to retain a required minimum percentage of their investments for a period of at least 3 years.
The VRR scheme was further amended on January 23, 2020, widening its scope and provides certain relaxations to FPIs.
Key features of the VRR Scheme:
- The FPI is required to retain a minimum of 75% of its Committed Portfolio Size for a minimum period of 3 years.
- The allotment of the investment amount would be through tap or auctions. FPIs (including its related FPIs) shall be allotted an investment limit maximum upto 50% of the amount offered for each allotment, in case there is a demand for more than 100% of amount offered.
- FPIs may, at their discretion, transfer their investments made under the General Investment Limit, if any, to the VRR scheme.
- FPIs may apply for investment limits online to Clearing Corporation of India Ltd. (CCIL) through their respective custodians.
- Investment under this route shall be capped at Rs. 1,50,000/- crores (erstwhile 75,000 crores) or higher, which shall be allocated among the following types of securities, as may be decided by the RBI from time to time.
- ‘VRR-Corp’: Voluntary Retention Route for FPI investment in Corporate Debt Instruments.
- ‘VRR-Govt’: Voluntary Retention Route for FPI investment in Government Securities.
- ‘VRR-Combined’: Voluntary Retention Route for FPI investment in instruments eligible under both VRR-Govt and VRR-Corp.
- Relaxation from (a) minimum residual maturity requirement, (b) Concentration limit, (c) Single/Group investor-wise limits in corporate bonds as stipulated in RBI Circular dated June 15, 2018 where exposure limit of not more than 20% of corporate bond portfolio to a single corporate (including entities related to the corporate) have been dispensed with. However, limit on investments by any FPI, including investments by related FPIs, shall not exceed 50% of any issue of a corporate bond except for investments by Multilateral Financial Institutions and investments by FPIs in Exempted Securities.
- FPIs shall open one or more separate Special Non-Resident Rupee (SNRR) account for investment through the Route. All fund flows relating to investment through the VRR shall reflect in such account(s).
What are the eligible instruments for investments?
- Any Government Securities i.e., Central Government dated Securities (G-Secs), Treasury Bills (T-bills) as well as State Development Loans (SDLs);
- Any instrument listed under Schedule 1 to Foreign Exchange Management (Debt Instruments) Regulations, 2019 other than those specified at 1A(a) and 1A(d) of that schedule; However, pursuant to the recent amendments, investments in Exchange Traded Funds investing only in debt instruments is permitted.
- Repo transactions, and reverse repo transactions.
What are the options available to FPIs on the expiry of retention period?
|Continue investments for an additional identical retention period|
|Liquidate its portfolio and exit; or
|Shift its investments to the ‘General Investment Limit’, subject to availability of limit under the same; or
|Hold its investments until its date of maturity or until it is sold, whichever is earlier.|
Any FPI wishing to exit its investments, fully or partly, prior to the end of the retention period may do so by selling their investments to another FPI or FPIs.
3-months investment deadline extended in view of COVID-19 disruption
As discussed above, once the allotment of the investment limit has been made, the successful allottees shall invest at least 75% of their CPS within 3 months from the date of allotment. While announcing various measures to ease the financial stress caused by the COVID-19 pandemic, RBI Governor acknowledged the fact that VRR scheme has evinced strong investor participation, with investments exceeding 90% of the limits allotted under the scheme.
Considering the difficulties in investing 75% of allotted limits, it has been decided that an additional 3 months will be allowed to FPIs to fulfill this requirement.
Which all FPIs shall be considered eligible to claim the relaxation?
FPIs that have been allotted investment limits, between January 24, 2020 (the date of reopening of allotment of investment limits) and April 30, 2020 are eligible to claim the relaxation of additional 3 months.
When does the retention period commence? What will be the implication of extension on retention period?
The retention period of 3 years commence from the date of allotment of investment limit and not from date of investments by FPIs. However, post above relaxation granted, the retention period shall be determined as follows:
|*Unqualified FPIs||Retention period commence from the date of allotment of investment limit
|**Qualified FPIs opting relaxation
|Retention period commence from the date that the FPI invests 75% of CPS|
|Qualified FPIs not opting relaxation
|Retention period commence from the date of allotment of investment limit|
*Unqualified FPIs – whose investments limits are not allotted b/w 24.01.2020 and 30.04.2020
**Qualified FPIs to relaxation – whose investments limits not allotted b/w 24.01.2020 and 30.04.2020
What will be the consequences if the required investment is not made within extended period of 3 months?
Since no separate penal provisions are prescribed under the circular, in terms of VRR Scheme, any violation by FPIs shall be subjected to regulatory action as determined by SEBI. FPIs are permitted, with the approval of the custodian, to regularize minor violations immediately upon notice, and in any case, within 5 working days of the violation. Custodians shall report all non-minor violations as well as minor violations that have not been regularised to SEBI
The COVID-19 disruption has adversely impacted the Indian markets where investors are dealing with the market volatility. Given this, FPIs are pulling out their investments from the Indian markets (both equity and debt). Thus, relaxing investments rules of VRR Scheme during such financial distress, will help the foreign investors manage their investments appropriately.
You may also read our write ups on following topics:
Relaxations to FPIs ahead of Budget, 2020, click here
Recommendations to further liberalise FPI Regulations, click here
RBI removes cap on investment in corporate bonds by FPIs, click here
SEBI brings in liberalised framework for Foreign Portfolio Investors, click here
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