Revised norms for FPI investments in debt: Bitter or sweet?

In October 2017, the Reserve Bank of India (RBI) had indicated undertaking a detailed review of current regulations on debt investment by foreign portfolio investors (FPI). The stated objective was to facilitate the process of investment and hedging by FPIs. In this context, in the first week of this fiscal year, the RBI revised the limits for FPI investment in debt.

The RBI, in consultation with Securities and Exchange Board of India (SEBI), has now announced changes on operational aspects of FPI investments.

The key changes include ease in minimum residual maturity period, increase in limit for investment in central government securities and discontinuation of the auction mechanism. The RBI has also introduced concentration and investor-wise limits.

Introduction of relaxation in the minimum residual maturity period is a welcome change, however, the overnight imposition of concentration limit is a big damper and would result in undue hardship for investors who were close to making investments.

Currently, FPIs are required to invest in debt with a minimum residual maturity of three years.

The RBI has now withdrawn this condition for investment in all categories of debt, central government securities, State Development Loans and corporate bonds. The relaxation for investment by FPI in debt with residual maturity below one year is permitted provided it does not exceed 20 percent of the total investment of an FPI in that category, on a continuous basis.

The RBI has clarified that all securities with residual maturity of less than one year will be reckoned for the 20 percent limit, regardless of the maturity of the security at the time of purchase. The RBI has provided a six months window to FPIs comply with this condition.

In October 2015, aggregate FPI investments in any Central Government security was capped at 20 percent of the outstanding stock of that security. FPI are now permitted FPI to invest Central Government security up to 30 percent of the outstanding stock of that security.

The RBI has restricted investment by FPI (including related FPIs) in corporate bonds to 50 percent of any issue of a corporate bond. Also, restriction has been introduced to limit FPI exposure to 20 percent of its corporate bond portfolio to a single corporate (including related entities). This is likely to impact private placement of debt by Indian companies.

If the current investment exceeds the above limits, the circular provide that no further investments permitted until these stipulations are met. Furthermore, a newly registered FPI is required to adhere to this stipulation starting no later than six months from the commencement of its investments.

Also, concentration limits for investment by FPI (including related FPIs) in debt has been notified. For long term FPIs the prescribed limit is 15 percent of the prevailing investment limit for that category and that for other FPIs is 10 percent. The RBI has prescribed one-time measure for investments currently exceeding the newly prescribed concentration limit.

Lastly, RBI has indicated that FPIs can invest in Treasury bills. However, investment is not permitted in partly paid instruments.

Clearing Corporation of India has commenced online monitoring of utilisation of Central Government securities limits. With this, RBI has decided to discontinue the auction mechanism with effect from June 1, 2018.