Relaxation in the Concentration Limit of FPIs for the Investment in the Indian Debt Market

Narendra Kumar

16 Sep, 2019

On 15^th February 2019, the Reserve Bank of India issued a circular to provide relaxation on the restrictions imposed on Foreign Portfolio Investors (FPIs). Prior to the current announcement, on 15^th June 2018 the RBI inflicted certain conditions for foreign portfolio investors (FPIs) for the investment through bonds in India. Here are some of the following:

• RBI brought down the minimum maturity period for FPIs from 3 years to 1 year.
• There was a single/ group investor-wise limits in corporate bonds and the exposure limit would not be more than 20% of its corporate bond portfolio within a single corporate.
• At last, the investment by any FPI should not go over 50% of any issue of a corporate bond.

What was the Purpose of introducing prior amendments issued on 15^th June 2018?

When the Reserve Bank of India came up with the amendments issued on 15^th June 2018, they thought-

• It would incentivize FPIs, so there could be a diverse portfolio of assets in the Indian Debt Market.
• However, it could not work out that way; in the statement released on Development and Regulatory Policies the RBI stated that after analyzing the market feedback, it had been noticed that the above restrictions led to the discouragement of FPIs from investing in India.
• The Reserve Bank of India wanted to remove these roadblocks so that India could attract long-term investors.

Now, what is the Purpose of circular released on 15th February, 2019 by the Reserve Bank of India?

The Reserve Bank of India^[1] released a circular on 15^th February 2019 stating that-

• The restriction of 20% over foreign portfolio investors (FPI) on corporate bond portfolio exposure has been withdrawn.
• RBI wants to encourage the wider spectrum of FPIs to access the Indian Market.
• The 20% restriction on the investment by any FPI has been augmented to 50%. Now, the investment by any FPI must not go over 50% of any issue of a corporate bond.

Note: Click here to read circular issued by RBI on 15^th February 2019 (Investment by Foreign Portfolio Investors (FPI) in Debt)

Our Opinion on the circular issued by the Reserve Bank of India:

“Regarding the relaxation in the Concentration limits of FPI for the investment in the Indian Debt Market”

If we go in the recent past, the Reserve Bank of India took measures to intensify the foreign investment in the Indian Debt Market by initiating the External Commercial Borrowing (ECB) regime to a wider range of borrowers and investors/ creditors. In the same way the new modifications in the FPI regime as per the RBI circular, in which the FPIs are entitled to the investment in the debt instruments issued by an entity of their choice up to the extent that they consider it commercially viable, so that there is no hindrance or obstruction on the quantum of their investment in the following entities.

• These flexibilities in the investment of FPIs will help in the long-term growth in the Indian debt market
• Government has removed the 20% restriction and stated that now the FPIs can invest up to 50% of the issue size of NCDs through corporate. Along with this, there has to be an appropriate structure so that these conditions can comply easily.
• The motive of the Reserve Bank of India behind all these liberalizations is to raise the inflow of foreign debt investment into India.
• In addition to the implementation of liberalization in the External Commercial Borrowing and Foreign Portfolio Investors regime, a substitute way of long-term investment in the Indian Debt Market has also been proposed.
• There would a distinct path or channel called “Voluntary Retention Route” (VRR) to enable the Foreign Portfolio Investors (FPI) to invest in India through the channel of debt route. And that route would not be confined with regulatory prescriptions, which are currently applied to FPI investment in India.
• Keeping these foreign investments free from regulatory prescriptions will again pull the long-term investors into India. And it would also retain these investors with their minimum percentage of investment in India for the time period of their choice and in sync with their philosophy of investment.