Investment by FPI in Defaulted Bonds – Relaxations by RBI

Ashish M. Shaji

23 Mar, 2021

The Reserve Bank of India vide A.P (DIR) Series circular no. 12 dated 26 February 2021 allowed certain relaxations in investment by the Foreign Portfolio Investors in defaulted bonds. These relaxations have been issued under the provisions of Section 10 (4) and 11 (1) of the Foreign Exchange Management Act, 1999 and are without any prejudice to permissions, approvals, necessary under any other law. In this article, we shall look at the relaxations offered by the RBI in the investment by FPI in defaulted bonds and also understand the concept of Foreign Portfolio Investor.

What is meant by Foreign Portfolio Investor (FPI)?

The term FPI refers to a person who fulfills the eligibility criteria as provided by Rule 4 of the Foreign Portfolio Investor regulations and who has been duly registered under the provisions of Chapter II.

Further, Foreign Institutional Investor and Qualified Portfolio Investor holding a valid registration certificate for a period of three years for which fees charged have been paid are known as FPI.

In simple words, an FPI is a foreign investor who invests in Indian shares and securities for not more than 10% of the total securities. It also meets the criteria provided by the regulations.

It may also be noted that FPI allows investors to buy stocks or other financial assets from the Indian Securities market, but FPI doesn’t provide an investor with direct ownership of financial assets.

Further, it should be taken into perspective that FPI is bifurcated into three categories based on the risk profile that are:

• Category I or low risk;
• Category II or moderate risk; and
• Category III or High risk.

Why were the relaxations for investment by FPI in defaulted bonds introduced?

This was done in order to further increase and boost FPIs in the corporate bond segment. The RBI decided to exempt FPI investment in the defaulted corporate bonds from the short-term limit and the minimum residual maturity condition under the Medium Term Framework.

Regulations and notifications considered for relaxing norms for investment by FPI in defaulted bonds

The various regulations and notifications considered for relaxing the investment norms for FPIs are as follows:

• The Foreign Exchange Management (Debt Instruments) Regulations 2019^[1] notified via FEMA 396/2019- RB dated 17^th Oct 2019;
• A.P (DIR) Series Circular number 31, dated 15^th June 2018;
• A.P (DIR) Series Circular number 31, dated 26^th November 2015; and
• Statement on Developmental and Regulatory Policies dated 5^th Feb 2021.

Conclusion

In a nutshell, Foreign Portfolio Investors are eligible to invest in the debt instruments and security receipts issued by the Asset Management Companies and also they are eligible to invest in the debt instruments provided by an entity under the CIRP, i.e., Corporate Insolvency Resolution Process, based on the resolution plan approved by the National Company Law Tribunal under the provisions of the Insolvency and bankruptcy Code of 2016.  Further, these investments are exempted from short term as well as minimum residual maturity condition under the Medium Term Framework.

Read our article:Analysis on Types of Foreign Investment in India: FPI, FDI and FI