**Executive Summary:**
This circular, issued by the Reserve Bank of India (RBI) on April 27, 2018, outlines revisions to the framework for Foreign Portfolio Investors (FPIs) in debt. It addresses operational aspects of FPI investments, including changes to minimum residual maturity requirements, security-wise limits, online monitoring of Gsec utilization, concentration limits, and single-group investor-wise limits in corporate bonds. These directions are effective immediately.
**Key Points / Main Content:**
* **Minimum Residual Maturity Requirement:**
* The minimum residual maturity requirement for Central Government securities (Gsecs) and State Development Loans (SDLs) is withdrawn, with the condition that investments in securities with residual maturity below 1 year by an FPI under either category shall not exceed 20% of the total investment of that FPI in that category.
* FPIs are permitted to invest in corporate bonds with a minimum residual maturity of above one year.
* **Security-wise Limit:**
* The cap on aggregate FPI investments in any Central Government security is revised to 30% of the outstanding stock of that security.
* **Online Monitoring of Gsec Utilisation Limits:**
* The auction mechanism for allocating Gsec limits is discontinued, effective June 1, 2018.
* Utilisation of FPI limits will be monitored online.
* **Concentration Limit:**
* Investment by any FPI in each of the three categories of debt, viz., Gsecs, SDLs and corporate debt securities, shall be subject to the following concentration limits:
* Longterm FPIs: 15% of prevailing investment limit for that category.
* Other FPIs: 10% of prevailing investment limit for that category.
*Relaxations are applicable as a one-time measure for FPIs exceeding the concentration limit on the effective date, subject to availability of overall category limits.
* **Single Group Investor-wise Limit in Corporate Bonds:**
* FPI investment in corporate bonds shall be subject to the following requirements:
* Investment by any FPI, including investments by related FPIs, shall not exceed 50% of any issue of a corporate bond.
* No FPI shall have an exposure of more than 20% of its corporate bond portfolio to a single corporate including exposure to entities related to the corporate.
* **Other Changes:**
* No FPI shall invest in partly paid instruments.
**Impact Analysis:**
**Foreign Portfolio Investors (FPIs):**
* *Impact:* Revised investment parameters will affect investment strategies, portfolio allocations, and risk management practices for FPIs investing in Indian debt markets.
* *Action Required:* FPIs need to review and adjust their investment strategies to comply with the new minimum residual maturity requirements, security-wise limits, concentration limits, and single group investor-wise limits. They must also monitor their Gsec utilisation online and adhere to the prohibition on investing in partly paid instruments.
**Authorised Dealer Category-I (AD Category-I) Banks:**
* *Impact:* AD Category-I banks must be aware of the revised regulations to facilitate and monitor FPI investments in debt instruments in compliance with the new guidelines.
* *Action Required:* AD Category-I banks should update their internal systems and procedures to reflect the changes in the regulatory framework and ensure compliance with the revised requirements for FPI investments.
**Clearing Corporation of India Ltd. (CCIL):**
* *Impact:* CCIL will be responsible for online monitoring of utilisation of Gsec limits by FPIs.
* *Action Required:* CCIL has commenced online monitoring of utilisation of Gsec limits.
Key Entities Referenced
State Development Loans: Debt instruments issued by the state governments in India.
Foreign Portfolio Investors: A category of investors as defined by the Securities and Exchange Board of India (SEBI) to invest in Indian financial markets.
Foreign Exchange Management Act, 1999: An Act of the Parliament of India to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India.
RBI: Reserve Bank of India, the central bank of India.
SEBI: Securities and Exchange Board of India, the regulator of the securities market in India.
Central Government securities: Debt instruments issued by the central government of India.
Clearing Corporation of India Ltd: A central counterparty and clearing house for various financial market segments in India.
Mumbai, Maharashtra: Financial center in India where RBI's Financial Markets Regulation Department is located.
RBI/2017-18/168
A.P. (DIR Series) Circular No. 24 April 27, 2018
To
All Authorized Persons
Madam / Sir
Investment by Foreign Portfolio Investors (FPI) in Debt - Review
Attention of Authorised Dealer Category-I (AD Category-I) banks is invited to Schedule 5 to the
Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside
India) Regulations, 2000 notified vide Notification No. FEMA.20/2000-RB dated May 3, 2000, as
amended from time to time and the relevant directions issued thereunder.
2. In terms of AP (DIR Series) Circular No. 22 dated April 6, 2018, the revised framework for
Foreign Portfolio Investors (FPI) in debt was announced. It was further stated that a separate
notification would be issued announcing other changes affecting operational aspects of FPI
investments in debt, in consultation with SEBI.
3. Accordingly, the changes to operational aspects of FPI investment are set forth below.
(a) Revision of minimum residual maturity requirement
(i) In terms of A.P. (DIR Series) Circular No. 13 dated July 23, 2014 , FPIs were required to
invest in Government bonds with a minimum residual maturity of three years. The
minimum residual maturity requirement for Central Government securities (G-secs) and
State Development Loans (SDLs) categories stands withdrawn, subject to the condition
that investment in securities with residual maturity below 1 year by an FPI under either
category shall not exceed, at any point of time, 20% of the total investment of that FPI in
that category.
(ii) In terms of A.P. (DIR Series) Circular No. 71 dated February 03, 2015, FPIs were
required to invest in corporate bonds with a minimum residual maturity of three years.
�वत्तीय बाज़ार �व�नयमन �वभाग,मुख्य भवन,पहल� मंिज़ल,शह�द भगत �सहं माग,र् फोटर्,मुंबई–400001.
फोन: (91-22) 22603000,फैक्स: (91-22) 22702290 ई-मेल: cgmfmrd@rbi.org.in
Financial Markets Regulation Department,Main Building, 1st Floor, Shahid Bhagat Singh Road, Fort, Mumbai – 400001.
Tel: (91-22) 22603000, Fax: (91-22) 22702290 e-mail- cgmfmrd@rbi.org.inHenceforth, FPIs are permitted to invest in corporate bonds with minimum residual
maturity of above one year.
(b) Revision of security-wise limit
The cap on aggregate FPI investments in any Central Government security, currently at 20% of
the outstanding stock of that security, in terms of A.P. (DIR Series) Circular No. 19 dated
October 6, 2015, stands revised to 30% of the outstanding stock of that security.
(c) Online monitoring of G-sec utilisation limits
Currently, FPIs are permitted to invest in G-secs till the limit utilization reaches 90%, after which
the auction mechanism is triggered for allocation of the remaining limit. With Clearing
Corporation of India Ltd. (CCIL) commencing online monitoring of utilisation of G-sec limits, it
has been decided to discontinue the auction mechanism with effect from June 1, 2018.
Utilisation of FPI limits shall be monitored online thereafter.
(d) Concentration limit
Investment by any FPI (including investments by related FPIs), in each of the three categories
of debt, viz., G-secs, SDLs and corporate debt securities, shall be subject to the following
concentration limits:
(i) Long-term FPIs: 15% of prevailing investment limit for that category.
(ii) Other FPIs: 10% of prevailing investment limit for that category.
(iii) In case an FPI has investments (INV ) in excess of the concentration limit on the
0
effective date (date on which these concentration limits come into existence), it will be
allowed the following relaxations, subject to availability of overall category limits, as a
one-time measure:
a. In case an FPI has investments (INV ) in excess of the concentration limit on the
0
effective date, it will be allowed to undertake additional investments such that its
portfolio size at any point in time (INV) does not exceed INV plus 2.5% of
t 0
investment limit for the category on the effective date. Once INV falls below the
t
prevailing concentration limit for the category, the FPI shall be free to make
investments up to the applicable concentration limit.
b. In case an FPI has investments (INV ) within the concentration limit, but in
0
excess of 7.5% (12.5% in case of FPIs in the ‘Long-term’ sub-category) of the
2investment limit for the category on the effective date, that FPI shall be allowed to
undertake additional investments such that its portfolio size at any point in time
(INV) does not exceed INV plus 2.5% of the investment limit for the category on
t 0
the effective date. Once INV falls below the prevailing concentration limit for the
t
category, the FPI shall be free to make investments up to the applicable
concentration limit.
c. All other FPIs will be allowed to invest up to the applicable concentration limit.
(e) Single/Group investor-wise limit in corporate bonds
FPI investment in corporate bonds shall be subject to the following requirements:
(i) Investment by any FPI, including investments by related FPIs, shall not exceed 50% of
any issue of a corporate bond. In case an FPI, including related FPIs, has invested in
more than 50% of any single issue, it shall not make further investments in that issue
until this stipulation is met.
(ii) No FPI shall have an exposure of more than 20% of its corporate bond portfolio to a
single corporate (including exposure to entities related to the corporate). In case an
FPI has exposure in excess of 20% to any corporate (including exposure to entities
related to the corporate), it shall not make further investments in that corporate until this
stipulation is met. A newly registered FPI shall be required to adhere to this stipulation
starting no later than 6 months from the commencement of its investments.
4. Other changes: No FPI shall invest in partly paid instruments.
5. These directions would be applicable with immediate effect.
6. The directions contained in this circular have been issued under sections 10(4) and 11(1) of
the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to
permissions/ approvals, if any, required under any other law.
Yours faithfully
(T. Rabi Sankar)
Chief General Manager
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