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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.
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.
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.
Following are the eligible instruments under Voluntary Retention Scheme:
Under VRR-Govt, FPIs will be eligible to invest in any Government Securities as mentioned below:
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, other than those specified at 1A (a) and 1A (d) of that Schedule.
FPIs can also invest under Repo Transactions which is better known as Repurchase Transactions and in Reverse Repo Transactions
Let us now discuss some of the various elements of the Voluntary Retention Scheme:
The investment shall be in addition to the General Investment Limit.
Moreover, the investment limit must be released in one or more tranches
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.
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.
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.
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.
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.
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:
However, please note that the amounts of investment shall be established by calculating in terms of the face value of securities.
In case an FPI does not want to continue under VRR at the end of the retention period, FPI may:
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.
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.
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 email@example.com.