RBI’s Voluntary Retention Route to Draw Foreign Investment

RBI’s Voluntary Retention Route to Draw Foreign Investment

The Reserve Bank of India (RBI) along with Government of India and Securities and Exchange Board of India (SEBI) has decided to introduce a new window called “Voluntary Retention Route” to encourage foreign investors in an attempt to draw in long term investments. The Voluntary Retention Route, which was first suggested in October 2018, will be open for investors from March 11, 2019.

What is Voluntary Retention Route?

Voluntary Retention Route (VRR) is introduced to encourage Foreign Portfolio Investors (FPIs) to undertake long-term investments in Indian debt markets. Under this scheme, FPIs have been given greater operational flexibility in terms of instrument choices apart from exemptions from specific regulatory requirements.

In simple terms, this scheme aims to draw in foreign investors who are willing to commit to keeping money in India for a minimum period. In return, they will get more operational freedom than regular foreign debt investors.

Who are the eligible investors under Voluntary Retention Scheme?

Any Foreign Portfolio Investor who is registered with SEBI is eligible to participate through this Route. Moreover, the participation of an FPI under this route should be voluntary.

Who are the eligible investors under Voluntary Retention Scheme

Eligible instruments under Voluntary Retention Scheme

Following are the eligible instruments under Voluntary Retention Scheme:

  • Investment Under VRR-Govt

Under VRR-Govt, FPIs will be eligible to invest in any Government Securities as mentioned below:

Eligible instruments under Voluntary Retention Scheme
  • Investment under VRR-Corp

Under VRR-Corp, FPIs may invest in any instrument listed under Schedule 5 of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 notified vide Notification No. FEMA.20(R)/2017-RB dated November 07, 2017[1], other than those specified at 1A (a) and 1A (d) of that Schedule.

  • Investment under Repo Transactions and Reverse Repo Transactions
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FPIs can also invest under Repo Transactions which is better known as Repurchase Transactions and in Reverse Repo Transactions

Features of Voluntary Retention Route

Let us now discuss some of the various elements of the Voluntary Retention Scheme:

  • Aggregate investment limit:

The investment shall be in addition to the General Investment Limit.

  1. For VRR-Govt – ₹ 40,000 crores
  2. For VRR-Corp – ₹ 35,000 crores

Moreover, the investment limit must be released in one or more tranches

  • Allocation of the Investment amount

The allocation of investment amount under this route to the FPIs shall be made on tap or through auctions. Moreover, details of the auction mechanism are given in here[2].

The mode of allotment, allocation to VRR-Govt and VRR-Corp categories and the minimum retention period shall be announced by the Reserve Bank ahead of allotment.

  • Minimum Retention Period

The minimum retention period under this scheme shall be for three years. Moreover, during the said period, FPIs shall maintain a minimum of 75% of the allocated amount in India.

  • Availability of Investment Limits

Investment limits shall be available on tap for investments and shall be allotted by Clearing Corporation of India Ltd. (CCIL) on ‘first come first served’ basis. The investment limits under the current tranche shall be kept open till the limits are exhausted or till April 30, 2019, whichever is earlier.

  • Application for Investment

FPIs who desire to invest can directly apply online to CCIL through their respective custodians. On the other hand, CCIL will separately notify the operational details of application and allotment.

  • Investment by FPIs

FPIs shall invest the amount allocated, called the Committed Portfolio Size (CPS) in the relevant debt instruments and remain invested at all times during the voluntary retention period, subject to the following relaxations:

  1. The minimum investment of an FPI during the retention period shall be 75% of the CPS (The flexibility for modulating investments between 75%-100% of CPS is intended to enable FPIs to adjust their portfolio size as per their investment philosophy).
  2. Also, the required investment amount shall be adhered to on an end-of-day basis. For this purpose, the investment shall include cash holdings in the Rupee accounts used for this Route.
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However, please note that the amounts of investment shall be established by calculating in terms of the face value of securities.

Voluntary Retention Scheme

Management of portfolio

  • Successful allottees require to invest 25% of their CPS within one month and the remaining amount within three months from the date of allotment. Moreover, the retention period will commence from the date of allotment of limit.
  • Before the end of the active retention period, an FPI, if it so desires, may opt to continue investments under this Route for an additional identical retention period. In that case, it shall convey this decision to its custodian.

Options  available to FPI in case of discontinuance under Voluntary Retention Route

In case an FPI does not want to continue under VRR at the end of the retention period, FPI may:

  • Liquidate its portfolio and exit, or
  • It may shift its investments to the ‘General Investment Limit’. This shifting would be subject to the availability of limitations under the ‘General Investment Limit’.

FPIs that wish to liquidate their investments under the Route before the end of the retention period may do so by selling their stakes to another FPI or FPIs.

Violation by FPIs

Any breach by FPIs shall be subject 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 five working days of the offense. Custodians shall report all non-minor violations as well as minor violations that have not been regularized to SEBI.

Facilities available to FPIs

  • FPIs investing through the Route will be eligible to participate in repos for their cash management, provided that the amount borrowed or lent under repo shall not exceed 10% of their investment under VRR.
  • Moreover, FPIs investing under this route shall be eligible to participate in any currency or interest rate derivative instrument, OTC or exchange-traded, to manage their interest rate risk or currency risk
  • Investments made through the Route shall not be subject to any minimum residual maturity requirement, concentration limit or single/group investor-wise limits applicable to corporate bonds as specified in paragraphs 4(b), (e) and (f) respectively of A.P. (DIR Series) Circular No. 31 dated June 15, 2018[3].
  • Income from investments through the Route may be reinvested at the discretion of the FPI. Such investments will be permitted even more than CPS.
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Other Operational Aspects

  • The utilization of limits and adherence to other requirements of this Route shall be the responsibility of both the FPI and its custodian.
  • Custodians shall not permit any repatriation from the cash accounts of an FPI if such transaction leads to the FPI’s assets falling below the minimum stipulated level of 75% of CPS during the retention period.
  • Custodians shall have in place appropriate legal documentation with FPIs that enables them (custodians) to ensure that regulations under VRR are adhere to.
  • Moreover, 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 Route shall reflect in such account(s).
  • FPIs shall also open a separate security account for holding debt securities under this Route.

RBI Press Release


To Sum Up

The RBI, in consultation with the government, has taken many steps in the last six months to ease the flow of foreign funds into India. Foreign investors using the Voluntary Retention Route will get some operational freedom in return for locking funds into India for three years. Moreover, the scheme aims to draw in foreign investors who are willing to commit to keeping money in India for a minimum period. Also, in return, they will get more operational freedom than regular foreign debt investors. We hope this article has given you relevant information on this newly introduced scheme issued by the RBI. For more information, please contact us at

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