RBI widens FPI’s avenue in corporate bonds

By Rajeev Jhawar (finserv@vinodkothari.com)

In recent times, the Government of India has liberalized the framework for raising External Commercial Borrowings(ECB) by Indian companies [read our article on this topic here]. Another change that we think can do good to India is the relaxation in the regulations for investments by Foreign Portfolio Investments(FPI).

The primary regulator for both the regime falls under the gamut of RBI because of the nature of capital account transaction between a resident and a non-resident. Since the FPI route consists of investment into the capital markets it is also regulated by the Securities and Exchange Board of India (SEBI), the primary capital market regulator in India.

The RBI vide its notification dated 27th April,2018, amended on 1^st May ,2018 to relax their terms of investments in corporate bonds and in this write up we intend to analyze the same.

FPIs can now invest in corporate bonds with less than 3-year maturity

The latest tenets concerning FPI’s investments in corporate bonds, issued by RBI might serve as a boom for the Indian corporate giants.“In order to bring consistency across debt categories, it is stipulated that investments by an FPI in corporate bonds with residual maturity below one year shall not exceed, at any point in time, 20 per cent of the total investment of that FPI in corporate bonds,” stated the RBI.

Prior to change, FPIs were only permitted to invest in corporate bonds with minimum residual maturity of three years or above. They are now being allowed to invest in securities of less than one year, with up to 20 per cent of their corpus.

The rationale could be to accelerate the demand for shorter maturity papers that matures within the span of twelve months. Treasury bills, commercial papers and certificate of deposits are few ubiquitous short-term maturity instruments.

Highlights with reference to the RBI’s circular dated 27th April,2018:

• Investment by any FPI, including investments by related FPIs, shall not exceed 50% of any issue of a corporate bond. In case an FPI, including related FPIs, has invested in more than 50% of any single issue, it shall not make further investments in that issue until this stipulation is met.
• As per A.P. (DIR Series) Circular No. 26 dated May 1, 2018 the term “related FPIs” refers to all FPIs registered by a non-resident entity. Illustratively, if a non-resident entity has set up five funds, each registered as an FPI for investment in debt, total investment by the five FPIs will be considered for application of concentration and other limits.
• No FPI shall have an exposure of more than 20% of its corporate bond portfolio on a single corporate. Investors who have more than 20 per cent of their investments in corporate bonds with less than one-year residual maturity, as on May 2, 2018 (beginning of day), have to bring such share below 20 per cent within a period of six months. A newly registered FPI would mean FPIs registered after April 27, 2018.