India: Investment In Corporate Debt By QFIs

Introduction

For larger participation of new category of overseas investor i.e. Qualified Foreign Investors ("QFIs") to invest in Indian Secondary Market, both Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI) has issued guidelines allowing overseas individual investors to invest up to $1 billion in corporate bonds and debt schemes of mutual funds without any lock-in period or residual maturity clause. RBI vide RBI/2012-13/134 A. P. (DIR Series) Circular No. 7 dated 16th July, 2012 and SEBI vide circulars CIR/ IMD/ FII&C/ 17 / 2012 dated 18th July, 2012 has decided to allow QFIs to purchase debt securities on repatriation basis.

Background

In 2011, the Government of India ('GOI') announced its intention to widen the class of foreign investors investing in Indian financial markets. The Indian Finance Minister in his Budget speech then, announced that foreign investors would be allowed to invest in domestic Mutual Funds ('MFs') schemes. Accordingly, SEBI and RBI issued Circulars on 9th August, 2011 allowing QFIs complying with the Know Your Customer ('KYC') norms to invest in equity and debt schemes of domestic MFs.

On 1st January, 2012, the GOI issued a press note stating that QFIs will now be allowed to invest in the equity shares of Indian companies. Both the market and banking regulators have issued detailed Circulars on 13th January, 2012 operationalizing the Scheme for investment by QFIs in Equity Shares.

In the Budget 2012-13, Government announced its intention to permit QFIs to invest in corporate bonds in India. When implemented, the QFI framework would stand extended to all three important segments of the Indian Capital markets, i.e., Mutual Funds, Equity Market and Corporate Bond Market.

In the following paragraphs, we highlight the key features of the regulations allowing QFIs to directly invest in Corporate Bond Market in light of RBI1 and SEBI2 Circular.3

Broad base of Definition of QFI

The list of countries from where QFIs could invest in the Indian capital market has been expanded.4 QFIs shall mean a person who is resident in a country that is a member of Financial Action task Force (FATF) or a member of a group which is a member of FATF5 and resident in a country that is a signatory to International Organization of Securities Commission (IOSCO's) Multilateral Memorandum of Understanding (MMoU ) or a signatory of a bilateral MoU with SEBI6.

Following persons are not covered in the definition of QFIs.:

(a) the person who is not resident in a country listed in the public statements issued by FATF from time to time on jurisdictions having a strategic Anti Money Laundering and Combating Financing of Terrorism AML/CFT deficiencies to which counter measures apply or that have not made sufficient progress in addressing the deficiencies or have not committed to an action plan developed with the FATF to address the deficiencies;

(b) the person who is not resident in India;

(c) the person is who not registered with SEBI as a Foreign Institutional Investor (FII) or Sub-Account of an FII or Foreign Venture Capital Investor (FVCI).

DP Responsibility and Obligations

The DP (Depository Participants) shall carry necessary due diligence and obtain appropriate declarations and undertakings from the QFI to ensure compliance with the SEBI and RBI circulars / guidelines.

Eligible instruments and eligible Transactions

QFIs shall be permitted to invest through SEBI registered Qualified Depository Participants (QDPs) in eligible corporate debt instruments, viz. listed Non-Convertible Debentures (NCDs), listed bonds of Indian companies, listed units of Mutual Fund debt Schemes and "to be listed" corporate bonds (hereinafter referred to as 'eligible debt securities') directly from the issuer or through a registered stock broker on a recognized stock exchange in India.7

The QFI transactions shall be limited to the following debt securities:

(i) Purchase and sale of corporate debt securities listed on recognized stock exchange(s);

(ii) Purchase of corporate debt securities through public issues, if the listing on recognized stock exchange(s) is committed to be done as per the extant provisions of the Companies Act, 1956;

(iii) Sale of corporate debt securities by way of buyback or redemption by the issuer;

(iv) Purchase and sale of units of debt schemes of Indian mutual funds.

QFIs shall also be permitted to sell 'eligible debt securities' so acquired by way of sale through registered stock broker on a recognized stock exchange in India or by way of buyback or redemption by the issuer.

Account, Mode of payment / repatriation and Demat Account

QFIs shall open a single non-interest bearing Rupee Account with an AD Category- I bank in India, for the limited purpose of routing the receipt and payment for transactions relating to purchase and sale of units of eligible debt securities8. The account shall be funded by inward remittance through normal banking channel and by credit of the sale/redemption/buyback proceeds (net of taxes) and on account of interest payment on debt securities. The funds in this account shall be utilized for purchase debt securities for QFIs or for remittance (net of taxes) outside India. The DP will operate such non-interest bearing Rupee Accounts on behalf of the QFIs and at the instructions of the QFIs. QFIs shall open a single demat account with a QDP in India for investment in all debt securities under the QFI scheme.9 Both QDPs and AD Category-I banks shall ensure KYC of the QFIs for opening and maintenance of the single non- interest bearing Rupee accounts as per the extant norms.10

Limits

QFIs are permitted to invest in corporate debt securities (without any lock-in or residual maturity clause) and Mutual Fund debt schemes subject to a total overall ceiling of USD 1 billion. This limit shall be over and above USD 20 billion for Foreign Institutional Investors (FII) investment in corporate debt. QFIs can invest without obtaining prior approval until the aggregate investments reaches 90% of USD1 billion (i.e. USD 900 million). For fresh purchases by QFIs after this cap, prior approval of the depositories is required to be obtained. The QFIs should make such request for prior approval to the concerned depository through the DP specifying therein the name of the QFI, PAN and other unique identification number relating to that QFI, by way of any mode of communication as specified by the depositories in consultation with each other. The depositories shall jointly publish/ disseminate the aggregate investment of QFIs to public, on daily basis.11

Miscellaneous

QFIs shall remit foreign inward remittance through normal banking channel in any permitted currency (freely convertible) directly into their single non- interest bearing Rupee account maintained with an AD Category-I bank. The pricing of all transactions and investment in all debt securities by QFIs shall be in accordance with the relevant and applicable guidelines issued from time to time. Both QDPs and AD Category-I banks (maintaining QFI accounts) will also ensure reporting to SEBI along with Reserve Bank of India. QFIs shall be permitted to hedge their currency risk on account of their permissible investments (in debt instruments) in terms of the guidelines issued by the Reserve Bank from time to time. Each QFI shall obtain a separate and distinct PAN. There is no requirement of registration of QFI with any of the regulator, except that they have to deal with qualified depository participant.

Some apprehensions by QFI

As QFIs need KYC requirements like PAN and tax return filings, these are believed to serve as hurdles to the scheme. The biggest apprehension is going through the complicated process of procuring a PAN in India and also filing tax returns.

Conclusion

It's a welcome change for the new class of investor as the same will boost the domestic markets with increased foreign inflows, with no registration compliance with any of the regulator. This is likely to attract greater foreign investment into the market as it provides an additional avenue for investors. The current regime for FIIs requires registration with SEBI and compliance with all the requirements under the FII Regulations, which is often considered onerous. The new proposal appears to rely more on self-regulation through DPs. Therefore, it has to be seen that, whether there can be shift of investor from FII route to QFI route in absence of minimal regulation.

Footnotes

1 Reserve Bank of India vide RBI/2012-13/134 A. P. (DIR Series) Circular No. 7 dated 16th July, 2012

2 SEBI circulars CIR/ IMD/ FII&C/ 17 / 2012 dated 18th July, 2012

3 Qualified Foreign Investor- Equity Investment, January, 2012, KPMG, http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/taxnewsflash/Documents/india2-jan-19-2012.pdf ; retrieved on 23rd July, 2012

4 Originally, it was limited to the 34 member countries, which are members of Financial Action task Force (FATF).

5 Expression Member of FATF shall not mean an associate member of FATF

6 Expression "bilateral MoU with SEBI" shall mean a bilateral MoU between SEBI and the overseas regulator that, inter alia, provides for information sharing arrangements.

7 The provisions relating to FIIs in case of non-listing of "to be listed" corporate bonds, within 15 days as per A.P. (DIR Series) Circular No. 89 dated March 1, 2012, shall be applicable to QFIs.

8 There is no more requirements for opening and maintenance of a single rupee pool bank account by the QDP and QFIs can henceforth invest in all debt securities for QFIs through this single non- interest bearing Rupee Account.

9 It is clarified that each QFI shall maintain a single demat account with a QDP for all investments in mutual fund, equity and debt securities for QFIs' in India. A QFI can open trading accounts with one or more SEBI registered stock brokers

10 DPs will ensure KYC of the QFIs as per the norms prescribed by SEBI in circular dated 13th January, 2012 and SEBI circulars issued in this regard from time to time.

11 SEBI circulars CIR/ IMD/ FII&C/ 17 / 2012 dated 18th July, 2012

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
C.Savva & Associates Ltd
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
C.Savva & Associates Ltd
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions