RBI removes short term investment limits and concentration limits in case of FPI

– Neha Malu, Associate | finserv@vinodkothari.com

On 8th May, 2025, RBI notified amendments to the Master Direction – Reserve Bank of India (Non-resident Investment in Debt Instruments) Directions, 2025, governing investments by Foreign Portfolio Investors in corporate debt securities. The changes impact both the general investment route and the Voluntary Retention Route (VRR).

What has changed?

A. Removal of short-term investment limit:
In the case of general route, the earlier cap that restricted a FPI investment in corporate debt securities with residual maturity of up to one year to 30% of its total investment in such securities has been repealed. 

However, under the general route, a separate provision, clause 4.4(i) continues to allow investment only in securities with original/residual maturity above one year. Therefore, while the 30% threshold is no longer relevant, FPIs under the general route still cannot invest in short-term corporate debt except debt securities provided in para 4.4(viii) which includes SRs and debt instruments issued by ARCs, debt instruments issued under CIRP, default bonds, PTCs and SDIs issued and listed as per SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008.

Under the VRR scheme, however, pursuant to para 5.4(v), the minimum residual maturity requirement does not apply. This means FPIs opting for the VRR can invest in corporate debt securities with shorter maturities, offering greater flexibility.

B. Withdrawal of concentration limits:
The previous restriction that capped FPI investment (including its related entities) in corporate debt securities to 15% (for long-term FPIs) and 10% (for other FPIs) of the prevailing investment limit has also been withdrawn. 

Implications:

The removal of these limits simplifies the regulatory framework and provides FPIs greater flexibility in structuring their debt portfolios. It may also help in improving the depth and liquidity of the corporate bond market, particularly in the short-end of the maturity spectrum.