RBI eases norms for Foreign Portfolio Investors to invest in debt

Jun 18, 2018 21:09 IST
RBI eases norms for Foreign Portfolio Investors to invest in debt

The Reserve Bank of India (RBI) on June 15, 2018 eased the norms for Foreign Portfolio Investors (FPIs) to invest in debt, particularly into individual large businesses.

The move is aimed at attracting more overseas flows.

Important Definitions

  • Short-term investments are defined as investments with residual maturity up to one year.
  •  “Multilateral Financial Institutions” mean FPIs which are Multilateral Financial Institutions in which Government of India is a member.

Minimum residual maturity requirement

• FPIs will now be permitted to invest in Government securities (G-secs) without any minimum residual maturity requirement, only on condition that short-term investments by an FPI shall not exceed 20 percent of the total investment.

• FPIs will be permitted to invest in corporate bonds with minimum residual maturity of above one year, only if short-term investments by FPI in corporate bonds shall not exceed 20 percent of the total investment of that FPI in corporate bonds.

• The requirement that short-term investments shall not exceed 20 percent of total investment by an FPI in any category applies on an 'end-of-day' basis.

• Short-term investments by an FPI may exceed 20 percent of total investments, only if investments consist entirely of investments made on or before April 27, 2018.

What is Residual Maturity?

Residual maturity is the remaining time left until the expiration or the repayment of the debt instrument.

Increased FPIs cap on investment

The RBI increased the FPIs cap on investment in government securities to 30 percent of the outstanding stock of that security, from the 20 percent earlier.

Online monitoring of investments in G-sec and SDL Categories

• FPIs are permitted to invest in G-secs till the limit utilisation reaches 90 percent and for the allocation of remaining 10 percent, an auction mechanism was triggered. Now, with the commencement of online monitoring of utilisation of G-sec limits by Clearing Corporation of India Ltd (CCIL), the auction mechanism has been discontinued with effect from June 1, 2018.

• The utilisation of FPI investment limits in G-secs and State Development Loans (SDLs) is being monitored online by the Clearing Corporation of India Ltd. (CCIL).

• CCIL will also monitor the various other limits and caps for FPI investment in G-secs and SDLs.

Concentration limits for Investment by any FPI

• Long-term FPIs: The concentration limit is 15 percent of prevailing investment limit.

• Other FPIs: The concentration limit is 10 percent of prevailing investment limit.

• All other FPIs will be allowed to invest up to the applicable concentration limit.

Investor-wise limits in corporate bonds

• Investment by any FPI, including investments by related FPIs, shall not exceed 50 percent of any issue of a corporate bond.

• In case an FPI, including related FPIs, has invested in more than 50 percent of any single issue, it shall not make further investments in that issue.

• No FPI will have an exposure of more than 20 percent of its corporate bond portfolio to a single corporate.

• ‘New’ investments, investments made after April 27, 2018 in corporates, by FPIs would be exempted from this requirement till March 31, 2019.

No investment in partly paid debt instruments

The RBI also stated that from now onwards, no FPI will invest in partly paid debt instruments.

What is Foreign Portfolio Investment (FPI)?

  • FPI consists of securities and other financial assets passively held by foreign investors.
  • The Foreign Portfolio Investment does not provide investor with direct ownership of financial assets.
  • In India, FPIs are allowed to invest in various debt market instruments such as government bonds, treasury bills, state development loans (SDLs) and corporate bonds, but with certain restrictions and limits.

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