MoF rolls out draft rules for foreign investment in Pension Funds

After 4 years of providing sectoral cap for the same.

Aanchal Kaur Nagpal | Executive

corplaw@vinod kothari.com

Pension Funds (‘PF’) are responsible for receiving contributions and managing pension corpus through various schemes[1] under National Pension System (‘NPS’) in accordance with the provisions specified by the PFRDA and carry out functions as per the directions of the NPS Trust. Presently, there are 3 companies registered as PF for government sector and 7 companies registered as PF for private sector. According to regulation 8(e) of the PFRDA (Pension Fund) Regulations, 2015[2], a sponsor of a PF is required to incorporate the pension fund as a separate limited company under the Companies Act, 2013. As on date, all existing PFs are unlisted companies.

Foreign investment in pension sector is permitted upto 49% under automatic route as per para F.9 of Schedule I to Foreign Exchange Management (Non-debt instruments) Rules, 2019 (‘NDI rules’). This was inserted in 2016 vide DIPP press note no. 2 of 2016[3].  Foreign investment in PF is required to be in accordance with Pension Fund Regulatory and Development Authority (PFRDA) Act, 2013 (‘PFRDA Act’). Foreign investment in PF is subject to the condition that entities investing in capital instruments issued by an Indian Pension Fund as per section 24 of the PFRDA Act are required to obtain necessary registration from the PFRDA and comply with other requirements as per the PFRDA Act[4] and Rules and Regulations framed under it for so participating in Pension Fund Management activities in India. An Indian pension fund needs to ensure that its ownership and control remains at all times with resident Indian entities as determined by the Government of India/ PFRDA as per the rules or regulation issued by them.

With a view to regulate foreign investment in PFs, the Ministry of Finance has introduced draft rules viz. Pension Fund (Foreign Investment) Rules, 2020 (‘Draft PF Rules) on 19th June, 2020 for public comments[5]. The Draft PF Rules continue to refer to FEMA (Transfer of Issue of Securities by a Person Resident outside India) Regulations, 2000 (‘TISPRO Regulations’) which was repealed in 2017 vide FEMA (Transfer of Issue of Securities by a Person Resident outside India) Regulations, 2017 and thereafter by FEMA (Non-Debt Instrument) Rules, 2019. Accordingly, the anomalies arising out of reference to TISPRO Regulations instead of NDI Rules are pointed in Annexure I.

Components of foreign investment

Foreign investment has been defined under rule 2(d) of the Draft PF Rules that means and includes investment made by following in the equity shares of a Pension Fund in India:

  • a foreign company, either by itself or through its subsidiary companies or its nominees; or
  • an individual; or
  • an association of persons, whether registered or not, under any law or a country outside India;
  • Foreign Venture Capital Invesment;
  • other eligible entities .

*Equity capital has been defined to have the same mean as section 43 of the Companies Act, 2013.

The total foreign investment will include both direct as well as indirect investment made by foreign investment.

Comment: The definition of foreign investment should be aligned with NDI Rules. The extent of foreign investment should be basis the investment made in equity instruments, as opposed to equity share capital.

Ceiling on quantum of foreign investment

Both, the PFRDA Act and NDI Rules restrict foreign investment in PFs upto 49%. The Draft PF Rules also follow the lead of these provisions and state that the aggregate holding in a PF by foreign investors, including foreign portfolio investors, should not exceed 49% of its paid-up equity share capital. [Rule 3 of the Draft PF Rules]. Further, foreign investment up to 49% is allowed through automatic route. [Rule 5 of the Draft PF Rules]

The total foreign investment would be a total of direct and indirect foreign investment calculated as per the PFRDA regulations read with the FDI policy. [Rule 2 (p) of the Draft PF Rules]

Indian ownership and control at all times

Rule 4 of the Draft PF Rules lays down that PFs in India must at all times ensure that their ‘ownership and control’ remains in the hands of resident Indian entities. For this purpose the rules have also defined ‘Indian Control’ and ‘Indian Ownership’ in Rule 2 (i) and (j) respectively. The same has been illustrated in the figure below:

This dual condition of ownership and control has been laid down to ensure that the decision making power of PFs stays with Indian investors at all times. PFs are vital institutional investors in the equity, debt and G-secs market. Handing out the controlling power to a foreign investor would affect the Indian capital markets and in turn the economy as a whole.

Foreign Portfolio Investment in PFs

FPI in PFs will be governed by the FEMA Regulations, 2000 along with SEBI (FPI) Regulations, 2019. [Rule 6 of the PF Rules]

Comment: The definition of foreign portfolio investment should be aligned with NDI Rules.

Increase in Foreign Investment in PFs

Pricing guidelines specified under FEM Regulations will have to be followed for increase in foreign investment of PFs.  [Rule 7 of the PF Rules]

Comment: Reference of Rule 21 of NDI Rules to be inserted.

The great wall for China

As a consequence of the COVID-19 pandemic lockdown as well as the increasingly strained relations between India and China, the former has imposed various restrictions on foreign investment by the latter.

The government has, vide the FEMA (NDI) Amendment Rules, 2020 dated 22nd April, 2020 posed the requirement of prior approval for any foreign investment by an entity of a country that shares land border with India in order to avoid opportunistic takeovers. This would even apply in cases where the beneficial ownership of the investment is situated in any of the restricted countries as well as to any case of transfer of ownership[1].

[1] To read out write-up on the same- http://vinodkothari.com/wp-content/uploads/2020/04/India-seals-its-borders-to-corporate-acquistions-ver-30.04.2020.p

In furtherance to this the Draft PF Rules specify that government approval will be required for investment in PF by foreign investors (entities as well as individuals) from any bordering countries including China. [Rule 8 of the Draft PF Rules]

Comment: Need to align with recent amendments made in Rule 6 (a) of NDI Rules restricting investments from countries sharing land border with India.

Link to our other articles:

  • MoF amends FDI norms for rights issue and insurance sector:

http://vinodkothari.com/2020/04/mof-amends-fdi-norms-for-rights-issue-and-insurance-sector/

 

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

http://vinodkothari.com/2020/04/introduction-to-fema-ndi-rules-2019-and-recent-amendments/

 

  • India seals its borders to corporate acquisitions

http://vinodkothari.com/2020/04/india-seals-its-borders-to-corporate-acquisitions/

 

  • FPI can invest up to the sectoral cap in an Indian Company

http://vinodkothari.com/2020/04/fpi-can-invest-upto-the-sectoral-cap-in-an-indian-company/


Annexure I

Suggested amendments

Sr. no. Provision Details of the provision Remarks
1. Rule 2(d) ‘Foreign Investment means…..

xx

in the equity shares of a PF in India under clause (i) of sub regulation (1) of regulation 5 of the Foreign Exchange Management (Transfer of issue of security by a person resident outside India) Regulations, 2000

 

The definition of foreign investment makes reference to guidelines as specified under the TISPRO Regulations which have been repealed.

 

The corresponding provisions are covered under rule 6(a) of the NDI Rules.

2. Proviso to Rule 2(d) Provided that for the purpose of these rules, foreign investment shall include investment by Foreign Venture Capital Investment (FVCI) as permissible under regulation 6 of FEMA Regulations, 2000 As stated above, reference has been made to the repealed regulations.

 

Investments made by an FVCI are governed by rule 16 read with Schedule VII of the NDI Rules. As per the schedule, PFs are not included in the list of sectors permitted for investment by an FVCI. However, in the Draft PF Rules, the same is permitted and included under foreign investment.

 

3. Rule 2(f) Foreign portfolio investment means and includes investments in the equity share of a pension fund in India by Foreign Institutional Investors, Foreign Portfolio Investors, Non-Resident Indian, Qualified Foreign Investors and other eligible portfolio investor entities or persons in accordance with provisions contained in sub-regulations 2, (2A), 3, and 8 of Regulation 5 of FEMA Regulations, 2000

 

Firstly, reference has been made to the repealed regulations.

 

Secondly and more importantly, the definition is not in line with that provided under the NDI Rules and thus creating conflict.

 

According to the NDI Rules, foreign portfolio investment means any investment made by a person resident outside India through equity instruments where such investment is less than 10% of the post issue paid-up share capital on a fully diluted basis of a listed Indian company or less than 10% of the paid-up value of each series of equity instrument of a listed Indian company;

 

The Draft PF Rules consider FPI in equity shares (as defined under rule 2(c) which states that equity share capital will have the same meaning as defined under section 43 of the Companies Act, 2013) of the Company while the NDI Rules compute FPI on the basis of equity instruments (as defined under rule 2k of the NDI Rules).

 

Accordingly reference of ‘investing in equity shares’ should be substituted with ‘investing in equity instruments’ of PF in India.

 

Further, as per NDI rules, any foreign investment in an unlisted Company is treated as a foreign direct investment (FDI) irrespective of the quantum. In case of listed companies, investment up to 10% is treated as FPI. However, in case of the definition as provided under the Draft PF Rules, investment in equity shares of a PF would be treated as FPI. Furthermore, most of the PFs in India are unlisted companies. This creates huge discrepancy as to the fact whether foreign investment would be treated as FDI if it exceeds 10 % (as per NDI Rules) or PFI (as per Draft PF Rules)

 

Hence, alignment with the existing definition specified under rule 2(t) of the NDI Rules does not seem to be a relevant solution.

 

4. Rule 2(i) “Indian Control” of a pension fund means Control of a pension fund in India by resident Indian citizens or Indian Companies, which are owned and controlled by resident Indian citizens. According to Rule 23(7)(e) of the NDI Rules, “company controlled by resident Indian citizens” means an Indian company, the control of which is vested in resident Indian citizens and/ or Indian companies which are ultimately owned and controlled by resident Indian citizens……

 

According to Rule 23(7)(d) of the NDI Rules “control” shall mean the right to appoint majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreement or voting agreement…….

 

The definition under the Draft PF Rules more or less are similar to that provided under the NDI Rules. However, the term used in the former is ‘Indian control’ which should be aligned with the NDI Rules using the term ‘controlled by resident Indian citizens’.

 

Also, control has not been defined under the Draft PF Rules.

 

5. Rule 2(j) “Indian Ownership” of a pension fund in India means more than 50% of the equity capital in it is beneficially owned by resident Indian citizens or Indian companies, which are owned and controlled by resident Indian citizens provided that the manner of the computation of foreign holding of such Indian promoter or Indian investment company shall be construed with the relevant Rules and PFRDA Regulations/ Guidelines.

 

According to Rule 23(7)(b) of the NDI Rules, “company owned by resident Indian citizens” shall mean an Indian company where ownership is vested in resident Indian citizens and/ or Indian companies, which are ultimately owned and controlled by resident Indian citizens……

 

According to Rule 23(7)(a) of the NDI Rules, “ownership of an Indian company” shall mean beneficial holding of more than fifty percent of the equity instruments of such company…

 

Both the definitions specify the same percentage. However, the Draft PF Rules make reference to equity capital which has been defined therein to have the same meaning as that specified in section 43 of the Companies Act, 2013.  As per section 43, “equity share capital”, with reference to any company limited by shares, means all share capital which is not preference share capital. This means in case of Draft PF Rules, only equity capital will be considered. As opposed to this, the NDI Rules refer to equity instruments which include shares, convertible debentures, preference shares and share warrants subject to conditions specified.

 

The same should be aligned with the NDI Rules along with the terminology used.

 

6. Rule 2 (n) ‘Resident Indian investment’ shall have the same meaning assigned to it in the FDI policy issued from time to time.

 

In case there is a specific clause to that effect in the FDI Policy, then the same may be retained else, the definition should be modified to mean ‘investment made by a person resident in India not resulting in indirect foreign investment’.
7. Rule 2 (q) All other words and expression used in these rules but not defined, and defined in the Act and Rules, regulations made thereunder shall have the same meanings respectively assigned to them.

 

As certain terms may not be defined in PFRDA Act, Rules and Regulations but may be defined in NDI Rules, reference of NDI Rules should be included.
8. Rule 6 Foreign Portfolio Investment in a Pension Fund in India shall be governed by the provisions contained in sub-regulations 2, (2A), 3, and 8 of Regulation 5 of FEMA Regulations, 2000 and Securities Exchange Board of India (Foreign Portfolio Investors) Regulations

 

Reference has been made to the repealed TISPRO Regulation, 2000.

 

Corresponding provisions under NDI Rules

·     For regulation 5(2A) of the TISPRO regulations for investment by Foreign Portfolio investors- Chapter 4 read with Schedule II of the NDI Rules;

·     For regulation 5(3) of the TISPRO  regulations dealing with investment by Non-resident Indians and Overseas Corporate Body – Chapter V read with Schedule III and Chapter VI read with Schedule V of the NDI Rules;

·     For regulation 5(8) of TISPRO regulations dealing with investment in depository receipts- rule 6(d) read with Schedule IX of the NDI Rules.

 

Further, the TISPRO Rules mention of the Foreign Portfolio Scheme which was foregone in the TISPRO Regulations, 2017 and later by the NDI Rules as well.

 

9. Rule 8 A Government approval will be required for the investing entity or individual from any of the bordering countries including China.

 

While the Draft PF Rules make use of the term ‘bordering countries’, the same should be aligned with the NDI rules that makes reference to ‘a country which shares land border with India’.

 

 

[1] https://www.pfrda.org.in/index1.cshtml?lsid=187

[2] http://www.npstrust.org.in/sites/default/files/PFRDA_PFReg2015.pdf

[3] https://dipp.gov.in/sites/default/files/pn2_2016_1.pdf

[4] http://legislative.gov.in/sites/default/files/A2013-23.pdf

[5] By July 18, 2020.

RBI amends mode of payment and remittance norms for units of Investment vehicles

Permits FPIs and FVCIs to use Special Non-Resident Rupee (SNRR) account 

CS Burhanuddin Dohadwala| Manager, Aanchal Kaur Nagpal| Executive

corplaw@vinodkothari.com

The Reserve Bank of India (‘RBI’) vide notification dated October 17, 2019 had  notified the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt instrument) Regulations, 2019[1] (‘the Regulations’) governing the mode of payment and reporting of non-debt instruments consequent to the Foreign Exchange Management (Non-Debt Instrument) Rules, 2019[2] framed by the Ministry of Finance, Central Government.

RBI has recently vide its notification dated June 15, 2020 notified Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) (Amendment) Regulations, 2020[3] amending Reg. 3.1 dealing with Mode of Payment and Remittance of sale proceeds in case of investment in investment vehicles.

Let us discuss few terms to understand the recent amendments to the Regulations.

Investment Vehicles under FEMA:

According to FEMA (Non-Debt Instruments) Rules, 2019, investment vehicles mean:

Different types of account available under FEMA (Deposit) Regulations, 2016[1] (‘Deposit Regulations’)

The following are the major accounts that can be opened in India by a non-resident:

Particulars Eligible Person
Non-Resident (External) Rupee Account Scheme-NRE Account

Non-resident Indians (NRIs) and Person of Indian Origin (PIOs)

Foreign currency (Non-Resident) account (Banks) scheme – FCNR (B) account
Non-Resident ordinary rupee account scheme-NRO account

Any person resident outside India.

Special Non-Resident Rupee Account – SNRR account

Any person resident outside India.

A significant advantage of SNRR over NRO is that the former is a repatriable account while the latter is non-repatriable.

What is Special Non-Resident Rupee (‘SNRR’) Account?

Any person resident outside India, having a business interest in India, may open SNRR account with an authorised dealer for the purpose of putting through bona fide transactions in rupees. The  business  interest,  apart  from  generic  business  interest,  shall  include the  following INR transactions, namely:-

  • Investments made  in  India  in  accordance  with  Foreign  Exchange  Management  (Non-debt Instruments)  Rules,  2019  dated  October  17,  2019  and  Foreign  Exchange  Management  (Debt  Instruments)
  • Import of  goods  and  services  in  accordance  with  Section  5  of  the  Foreign  Exchange  Management  Act  1999 Regulations,   2019;
  • Export of  goods  and  services  in  accordance  with  Section  7  of  the  Foreign  Exchange  Management  Act  1999;
  • Trade credit   transactions   and   lending   under   External   Commercial   Borrowings   (ECB)   framework;
  • Business related  transactions  outside  International  Financial  Service  Centre  (IFSC)  by  IFSC  units  at  GIFT  city  like  administrative  expenses  in  INR  outside  IFSC,  INR  amount  from  sale  of  scrap,  government  incentives  in  INR,  etc;

Rationale behind the amendment:

Position under Master Direction – Foreign Investment in India by RBI

According to Annex 8 of Master Direction – Foreign Investment in India by RBI, investment made by a PROI was permitted with effect from 13th September, 2016. The provisions specify that the amount of consideration of the units of an investment vehicle should be paid out of funds held in NRE or FCNR(B) account maintained in accordance with the Deposit Regulations as one of the modes of payment.

Further it also specifies that the sale/ maturity proceeds of the units may be remitted outside India or credited to the NRE or FCNR(B) account of the person concerned.

Position under the erstwhile provisions of the Regulations

Schedule II of the Regulations (Investments by FPIs) stated earlier that of units of investment vehicles other than domestic mutual fund may be remitted outside India.

However, balances in SNRR account were permitted to be used for making investment only in units of domestic mutual fund and not in Investment Vehicles.

As discussed above, the NRO account is a non-repatriable account while the SNRR account is a repatriable account. Due to the above provisions, investment in Investment Vehicles could not be transferred to the SNRR account for repatriation resulting in ambiguity.

Owing to the above and to increase the inflow of foreign investment, the Government has amended the said provision and allowed FPIs & FVCI to invest in listed or to be listed units of Investment vehicle.

Brief comparison of the pre and post amendment is covered in our Annexure I.

Annexure-I

Comparison of the pre and post amendment

Schedule Post amendment Prior to amendment Remarks
Schedule II w.r.t Investments by Foreign Portfolio Investors A.     Mode of payment

1.       The  amount  of  consideration  shall  be  paid  as  inward  remittance  from  abroad through banking channels or out of funds held in a foreign currency account and/ or a Special Non-Resident Rupee (SNRR) account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.

 

2.       Unless otherwise  specified in these regulations or the  relevant Schedules, the foreign  currency  account  and  SNRR  account  shall  be  used  only  and  exclusively for transactions under this Schedule.

 

 

 

A.     Mode of payment

1.       The amount of consideration shall be paid as inward remittance from abroad through banking channels or out of funds held in a foreign currency account and/ or a Special Non-Resident Rupee (SNRR) account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.

Provided balances in SNRR account shall not be used for making investment in units of Investment Vehicles other than the units of domestic mutual fund.

2.       The foreign currency account and SNRR account shall be used only and exclusively for transactions under this Schedule.

 

 

The erstwhile provisions restricted use of SNRR account balance for making investments in investment vehicles other than mutual funds.

As a result FPIs could not use their SNRR account and had to resort to other types of accounts for investment in investment vehicles such as REITs, and InViTs. The recent amendment has removed this restriction.

The amendment has been made to provide for the amendment made in Schedule VIII dealing with Investment     by     a     person resident outside India in an Investment Vehicle.

B.     Remittance of sale proceeds

The sale proceeds (net of taxes) of equity instruments and units of REITs, InViTs and domestic mutual fund may be remitted outside India or credited to the foreign currency account or a SNRR account of the FPI.

B.     Remittance of sale proceeds

The sale proceeds (net of taxes) of equity instruments and units of domestic mutual fund may be remitted outside India or credited to the foreign currency account or a SNRR account of the FPI.

The sale proceeds (net of taxes) of units of investment vehicles other than domestic mutual fund may be remitted outside India.

To align with the amendment made in Schedule VIII dealing with Investment     by     a     person resident outside India in an Investment Vehicle.
Schedule VII w.r.t Investment by a Foreign Venture Capital Investor (FVCI) For Para A(2):

Unless otherwise specified in these regulations or the relevant Schedules, the foreign currency account and SNRR account shall be used only and exclusively for transactions under this Schedule.

For Para A(2):

The foreign currency account and SNRR account shall be used only and exclusively for transactions under this Schedule.

 

The insertion has been made to align with the amendments proposed in Schedule VIII dealing with Investment     by     a     person resident outside India in an Investment Vehicle.

Schedule VIII w.r.t Investment     by     a     person resident  outside  India  in  an Investment Vehicle A.     Mode of payment:

The  amount  of  consideration  shall  be  paid  as  inward  remittance  from  abroad through  banking  channels  or  by  way  of  swap  of  shares  of  a  Special  Purpose Vehicle   or   out   of   funds   held   in   NRE   or   FCNR(B)   account   maintained   in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.

Further,  for  an  FPI  or  FVCI,  amount  of  consideration  may  be  paid  out  of  their SNRR  account  for  trading  in  units  of  Investment  Vehicle  listed  or  to  be  listed (primary issuance) on the stock exchanges in India.

A.     Mode of payment:

The amount of consideration shall be paid as inward remittance from abroad through banking channels or by way of swap of shares of a Special Purpose Vehicle or out of funds held in NRE or FCNR(B) account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.

 

Further, it is clarified that the SNRR account may be used for trading in units of listed as well as to be listed units of investment vehicles and the sale/ maturity proceeds can be credited to the said account.

B.     Remittance of Sale/maturity proceeds:

The  sale/  maturity  proceeds  (net  of  taxes)  of  the  units  may  be  remitted  outside India or may be credited to the NRE or FCNR(B) or SNRR account, as applicable of the person concerned.

B.     Remittance of sale/maturity proceeds

The sale/maturity proceeds (net of taxes) of the units may be remitted outside India or may be credited to the NRE or FCNR(B) account of the person concerned.

 

 

Link to our other articles:

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

http://vinodkothari.com/2020/04/introduction-to-fema-ndi-rules-2019-and-recent-amendments/

RBI rationalises operation of Special Non-Resident Rupee A/c:

http://vinodkothari.com/wp-content/uploads/2019/11/RBI-rationalises-operation-of-SNRR-Account.pdf

 

[1] http://vinodkothari.com/wp-content/uploads/2019/11/RBI-rationalises-operation-of-SNRR-Account.pdf

[1] http://egazette.nic.in/WriteReadData/2019/213318.pdf

[2] http://egazette.nic.in/WriteReadData/2019/213332.pdf

[3] http://egazette.nic.in/WriteReadData/2020/220016.pdf

RBI grants additional 3 months to FPIs under Voluntary Retention Route

Shaifali Sharma | Vinod Kothari and Company

corplaw@vinodkothari.com

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)[1]. 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[2], 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[3] (subsequently the scheme was amended on May 24, 2019[4]), 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[5], widening its scope and provides certain relaxations to FPIs.

Key features of the VRR Scheme:

  1. The FPI is required to retain a minimum of 75% of its Committed Portfolio Size for a minimum period of 3 years.
  2. 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.
  3. FPIs may, at their discretion, transfer their investments made under the General Investment Limit, if any, to the VRR scheme.
  4. FPIs may apply for investment limits online to Clearing Corporation of India Ltd. (CCIL) through their respective custodians.
  5. 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.
    1. ‘VRR-Corp’: Voluntary Retention Route for FPI investment in Corporate Debt Instruments.
    2. ‘VRR-Govt’: Voluntary Retention Route for FPI investment in Government Securities.
    3. ‘VRR-Combined’: Voluntary Retention Route for FPI investment in instruments eligible under both VRR-Govt and VRR-Corp.
  6. 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[6] 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.
  7. 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?

  1. Any Government Securities i.e., Central Government dated Securities (G-Secs), Treasury Bills (T-bills) as well as State Development Loans (SDLs);
  2. 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.
  3. Repo transactions, and reverse repo transactions.

What are the options available to FPIs on the expiry of retention period?

Option 1

 

Continue investments for an additional identical retention period
 

 

 

Option 2

 

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:

FPIS

 

RETENTION PERIOD
*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

Concluding Remarks

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 

For more write ups, kindly visit our website at: http://vinodkothari.com/category/corporate-laws/

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

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

[6] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT199035211F142484DEBA657412BFCB17999.PDF

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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