India: Foreign Portfolio Investment In Debt Securities: Sweeping Changes In Legal Framework

Amidst growing investor appetite for Indian debt securities and increased government and corporate debt needs, the Foreign Portfolio Investment (FPI) route has been a dominant source of foreign funding. Liberalisation of the FPI route to allow investment in unlisted debt securities had further bolstered investments through this route. However, the Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI) have issued various circulars over the last couple of weeks, which have introduced extensive changes in the legal framework governing FPIs which will impact investment through this route, being:

  1. A.P. (DIR Series) Circular No. 22 dated 6 April 2018 (6 April Circular) – revises the debt limits applicable to FPIs in various debt securities and eased the requirement of purchasing the limits through the auction process.
  2. A.P. (DIR Series) Circular No. 24 dated 27 April 2018 (27 April Circular) and a subsequent clarificatory circular no. A.P (DIR Series) Circular No. 26 dated 1 May 2018 (1 May Circular) - revises minimum maturity requirements and introduces concentration limits and investor-wise limits for FPI investments.

Further, SEBI has introduced Know Your Client Requirements for FPIs by way of a circular dated 10 April 2018 (SEBI Circular) which we have detailed in a separate update dated 17 April 2018.

6 April Circular – Key Changes

  • Single limit for corporate bonds: The overall limit for FPI investment in corporate bonds has been fixed at 9%. The FPI limit in corporate bonds would hence go up to Rs 2660 billion in the first half of fiscal 2018 from Rs 2440 billion currently, and further increase to Rs 2890 billion in the second half of 2018-19. Further, existing sub-categories under corporate bonds (i.e. credit enhanced bonds, unlisted corporate debt securities and long-term investor category) have been discontinued and replaced with a single limit for FPI investment for all types of corporate bonds.
  • Two stage increase for Government Securities (G-Secs) limits: The limit for FPI investment in G-Secs is sought to be increased in two tranches by 0.5% each year for the next two years; i.e., from 5% to 5.5% of the outstanding stock of securities in the financial year 2018-2019 and to 6% in the financial year 2019-2020 (based on half yearly financials).
  • Re-investment of coupon in G-Secs: Earlier, re-investment of coupon by FPIs in G-Secs was not accounted for within the investment limit - this has now been brought within the G-Secs investment limits.
  • Limit for State Development Loans (SDLs): No fresh allocation of limits has been made for SDLs. Further, out of the existing limit of Rs 136 billion for long-term SDLs, Rs 65 billion have been transferred to the G-Secs category.
  • The revised limits on FPI investment is as illustrated in the table below:

In Rupees crore

G-Sec-General G-Sec-Long Term SDL -General SDL-Long Term Corporate Bonds Total Debt
Current Limit 191,300 65,100 31,500 13,600 244,323 545,823
Revised Limit for the HY Apr-Sep, 2018 207,300* 78,700 34,800 7,100 266,700 594,600
Revised Limit for the HY Oct 2018-March, 2019 223,300* 92,300 38,100 7,100 289,100 649,900
* Includes ₹ 4,760 crore one-time addition to limit to provide for inclusion of coupon investment amount in utilization.

Table 1: Revised limits on foreign portfolio investor investments for the financial year 2018-2019

Key Features of the 27 April Circular and 1 May Circular

  • Minimum residual maturity reduced to one year:

    • Corporate Bonds: Under the extant framework, FPIs were permitted to invest in corporate bonds with a minimum residual maturity of 3 years, which has now been reduced to 1 year under the 27 April Circular. The 1 May Circular further clarifies that FPI investments in corporate bonds with residual maturity below 1 year shall not exceed, at any point in time, 20% of the total investment of that FPI in corporate bonds. Accordingly, at any point in time, all securities with residual maturity of less than one year will be reckoned for the 20% limit, regardless of the maturity at the time of purchase by the FPI. In the event that securities with residual maturity of less than 1 year as on 2 May 2018 exceeds 20% of the total investment in any category, the FPI shall ensure that it is brought down to 20% or lower of the total investment within 6 months from the date of the 1 May Circular, i.e., 31 October 2018. Further, the FPI investor shall ensure that no further additions are made to such portfolio of securities, either by fresh purchases or roll-down of investments with current tenor exceeding 1 year.
    • G-Secs: The minimum residual maturity for FPI investments in G-Secs as well as SDLs stands reduced from 3 years to 1 year. Further, FPI investment in such securities for a period less than 1 year is capped at 20% of the total investment of that FPI in either category.
  • Treasury Bills: FPIs are also permitted to invest in treasury bills issued by the Central Government.
  • Concentration limits for FPI investments for all Debt Investments: FPI investment in all three categories of debt, i.e., G-secs, SDLs and corporate debt securities are now subject to concentration limits:

    • In case of long-term FPIs, the concentration limit is 15% of the prevailing investment limit for that category.
    • In case of other FPIs, the concentration limit shall be 10% of the prevailing investment limit for that category.
    • The following new formulae have been specified in the event that FPI investments exceed the prescribed concentration limits as on the effective date1:
Abbreviation
Investment by FPI on the effective date INV0
Investment by FPI at a given point in time INVt
Investment Limit IL
Concentration Limit on the effective date CL

If INVo > CL, then the following relaxations shall apply, subject to the overall limit as applicable:

  1. Additional investments at any point in time should represent INVt
  2. If INVt < CL, then investments may be made upto the applicable concentration limit.
  3. If INV0 but INV0 > 7.5% of IL,

then investments may be made upto the point when the total investments reflect INVt

  • Investment-wise limits for corporate bonds: All investments by FPIs (including investments by 'related' FPIs) shall not exceed 50% of any corporate bond issue. If the investment has exceeded 50%, then the FPI shall not make further investments in that issue until such stipulation is met. Further, an FPI cannot have an exposure exceeding 20% of its corporate bond portfolio with respect to a single corporate entity, and in case such exposure exceeds 20%, it cannot incur further exposure to such entity until such stipulation is met. Newly registered FPIs have been provided a period of 6 months (from the date of commencement of their investments) to adhere to these stipulations.

The 1 May Circular defines the following terms in context of the investment limits:

  1. 'related entities' shall have the meaning as defined in section 2 (76) of the Companies Act, 2013 e.g. this would cover any holding, subsidiary or associate company or a common subsidiary of the same holding company;
  2. "related FPIs" shall refer to all FPIs registered by a non-resident entity. Illustratively, if a non-resident entity has set up five funds, each registered as an FPI for investment in debt, total investment by the five FPIs will be considered for application of concentration and other limits.
  3. "newly registered FPI" shall mean an FPI registered after 27 April 2018.

    • Partly paid instruments: FPIs cannot invest in partly paid instruments.
    • Revision of security-wise limits for G-Secs: The aggregate cap on FPI investments in G-Secs has been revised to 30% of the outstanding stock from the earlier 20% cap.
    • Shift from auction mechanism to an online monitoring system for G-Secs only: Under the earlier framework, when FPI investment in G Secs reached 90% of the allowed limit utilisation, it triggered the requirement for an auction mechanism for allocation of the remaining 10% of the limit. This auction mechanism has been discontinued to pave way for online monitoring of G-Secs by the Clearing Corporation of India with effect from 1 June 2018.

Comment

The raising of limits on FPI investment along with relaxation of minimum residual maturity from 3 years to 1 year is a welcome move and comes with a clear agenda to enhance demand for debt securities in the domestic market, given the encouraging demand for FPI debt amidst rising stability of the Indian rupee and as a cost-efficient tool for hedging investments. The changes encourage foreign investors to remain invested and cool of bond yields as mark to market losses will be lower in shorter tenor bonds. Further, the dispensation of the sub-categories in the corporate bond segment is likely to trigger increased FPI debt flow. The total utilisation of the FPI limits was close to 100% at the end of March and with the current changes, it is now closer to 80-85% and is an encouraging change for foreign investors. However, the potential impact of the exposure and concentration limits on acquisition funding structures remains to be seen.

Footnotes

1 As per the 27 April Circular, the 'effective date' shall mean the date on which these concentration limits come into existence

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
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