Introduction to FEMA (NDI) Rules, 2019 and recent amendments

 

For relevant questions discussed during the webinar, click here.

Relaxations to FPIs ahead of Budget, 2020

Timothy Lopes, Executive, Vinod Kothari Consultants Pvt. Ltd.

timothy@vinodkothari.com

As investors wait eagerly in anticipation of what changes Budget, 2020 could bring, the RBI has on 23rd January, 2020[1], provided a boost by revising the norms for investment in debt by Foreign Portfolio Investors (FPIs). This comes as a boost to FPIs as the revised norms allow more flexibility for investment in the Indian Bond Market.

Further the RBI has also amended the Voluntary Retention Route for FPIs extending its scope by increasing the investment cap limit to almost twice the previously stated amount. The amendments widen the benefits to FPIs who invest under the scheme.

This write up intends to cover the revised limits in brief.

Review of limits for investment in debt by FPIs

  1. Investment by FPIs in Government securities

As per Directions issued by RBI[2] with respect to investment in debt by FPIs, FPIs were allowed to make short term investments in either Central Government Securities or State Development Loans. However, the said short term investment was capped at 20% of the total investment of that FPI, i.e., the short term investment by an FPI in Government Securities earlier could not exceed 20% of their total investment.

The above limit of 20% has now been increased to 30% of the total investment of the FPI.

  1. Investment by FPIs in Corporate Bonds

Similar to the above restriction, FPIs were also restricted from making short term investments of more than 20% of their total investment in Corporate Bonds.

The above cap is also increased from 20% to 30% of the total investment of the FPI.

The above increase in investment limits provides more flexibility for making investment decisions by FPIs.

Exemptions from short term investment limit

As per the RBI directions, certain types of securities such as Security Receipts (SRs) were exempted from the above limit. Thus, the above short term investment limit were not applicable in case of investment by an FPI in SRs.

Now the above exemption is extended to the following securities as well –

  • Debt instruments issued by Asset Reconstruction Companies; and
  • Debt instruments issued by an entity under the Corporate Insolvency Resolution Process as per the resolution plan approved by the National Company Law Tribunal under the Insolvency and Bankruptcy Code, 2016

This widens the scope of investment by FPIs who wish to make short term investments in debt.

Further the requirements of single/group investor-wise limits in corporate bonds are not applicable to investments by Multilateral Financial Institutions and investments by FPIs in ‘Exempted Securities’.

Thus this amendment brings in more options for FPIs to invest without having to consider the single/group investor-wise limits.

Relaxations in “Voluntary Retention Route” for FPIs

The Voluntary Retention Route for FPIs was first introduced on March 01, 2019[3] with a view to enable FPIs to invest in debt markets in India. FPI investments through this route are free from the macro-prudential regulations and other regulatory norms applicable to FPI investment in debt markets subject to the condition that the FPIs voluntarily commit to retain a required minimum percentage of their investments in India for a specified period.

Subsequently the scheme was amended on 24th May, 2019[4].

On 23rd January, 2020[5] the RBI has brought in certain relaxations to the above VRR scheme. The changes made are most certainly welcome since it increases the scope of the scheme and provides relaxations to FPIs. The highlights are as under –

Increase in investment cap –

Investment through the VRR for FPIs was earlier subject to a cap of Rs. 75,000 crores. As on date around Rs. 54,300 crores has already been invested in the scheme. Thus based on feedback from the market and in consultation with the Government it was decided to increase the said investment limit to Rs. 1,50,000 crores.

Transfer of investments made under General Investment Limit to VRR –

‘General Investment Limit’, for any one of the three categories, viz., Central Government Securities, State Development Loans or Corporate Debt Instruments, means the FPI investment limits announced for these categories under the Medium Term Framework, in terms of RBI Circular dated April 6, 2018, as modified from time to time.

Now the RBI has allowed FPIs to transfer their investments made under the above mentioned limit to the VRR scheme.

Investment in ETFs that trade invest only in debt

Earlier under the VRR scheme, investments were allowed in the following –

  • 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 notified, vide, Notification dated October 17, 2019, other than those specified at 1A(a) and 1A(d) of that schedule;
  • Repo transactions, and reverse repo transactions.

Pursuant to the amendment, the RBI has allowed FPIs to invest in Exchange Traded Funds (ETFs) investing only in debt instruments.

Further the following features are introduced for the fresh allotment opened by RBI under this route –

  1. The minimum retention period shall be three years.
  2. Investment limits shall be available ‘on tap’ and allotted on ‘first come, first served’ basis.
  3. The ‘tap’ shall be kept open till the limit is fully allotted.
  4. FPIs may apply for investment limits online to Clearing Corporation of India Ltd. (CCIL) through their respective custodians.
  5. CCIL will separately notify the operational details of application process and allotment.

Conclusion

The changes made by RBI certainly attract more FPIs to the Indian Bond Market and extends its scope. The relaxations come ahead of the Budget, 2020 wherein foreign investors have more expectations for new reforms to boost growth and investment in the Indian economy.

Links to our earlier write ups on the subject –

Recommendations to further liberalise FPI Regulations –

http://vinodkothari.com/2019/06/recommendations-to-further-liberalise-fpi-regulations/

RBI removes cap on investment in corporate bonds by FPIs –

http://vinodkothari.com/2019/02/rbi-removes-cap-on-investments-in-corporate-bonds-by-fpis/

RBI widens FPI’s avenue in corporate bonds –

http://vinodkothari.com/2018/05/rbi-widens-fpis-avenue-in-corporate-bonds/

Investment by FPIs in securitised debt instruments

http://vinodkothari.com/2018/06/investment-by-fpis-in-securitised-debt-instruments/

SEBI brings in liberalised framework for Foreign Portfolio Investors –

http://vinodkothari.com/2019/09/sebi-brings-in-liberalised-framework-for-foreign-portfolio-investors/

 

[1] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/APDIR18184461ABA6F14E2EA51DF0243B610CE6.PDF

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

[3] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11492&Mode=0

[4] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11561&Mode=0

[5] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/APDIR19FABE1903188142B9B669952C85D3DCEE.PDF