Executive Summary:
This circular from the Reserve Bank of India addresses Foreign Portfolio Investor (FPI) investments in debt, providing clarifications and modifications to existing regulations. It stipulates that investments by an FPI in corporate bonds with residual maturity below one year shall not exceed 20% of the total investment of that FPI in corporate bonds. FPIs exceeding the 20% limit as of May 2, 2018, have six months to comply. The implementation date for online monitoring of Gsec limits is June 1, 2018.
Key Points / Main Content:
* **Investments in Debt Instruments:**
* Investments by an FPI in corporate bonds with residual maturity below one year shall not exceed 20% of the total investment of that FPI in corporate bonds.
* FPIs are permitted to invest in treasury bills issued by the Central Government.
* **20% Limit Applicability:**
* The 20% limit on investments in securities (Gsecs, SDLs, or corporate bonds) with residual maturity below one year applies continuously.
* 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.
* **Compliance Timeline:**
* FPIs exceeding the 20% limit as of May 2, 2018, must reduce the share below 20% within six months from the date of the circular.
* No further additions should be made to the portfolio of securities with residual maturity of less than one year as on May 2, 2018, until the share falls below 20%.
* **Definition of Related FPIs:**
* "Related FPIs" refers to all FPIs registered by a nonresident entity; total investment by all such FPIs will be considered for concentration and other limits.
* **Corporate Bond Concentration Limit:**
* "Related entities" have the same meaning as defined in section 276 of the Companies Act, 2013.
* "Newly registered FPI" means FPIs registered after April 27, 2018.
* **Gsec Limit Monitoring:**
* Online monitoring of Gsec limits will be implemented on June 1, 2018.
* The existing process for monitoring limits and allocation through auction will continue until then.
Impact Analysis:
* **Authorized Dealer Category-I (AD Category-I) banks:**
* Impact: AD Category-I banks need to be aware of the revised guidelines and ensure compliance by FPIs.
* Action Required: Inform FPI clients about the changes, monitor their investment portfolios for compliance, and report as required.
* **Foreign Portfolio Investors (FPIs):**
* Impact: FPIs need to comply with the new restrictions on investments in debt instruments with less than one year residual maturity.
* Action Required: Review their portfolios, ensure compliance with the 20% limit, and adjust their investment strategies accordingly within the specified timelines. Newly registered FPIs need to be aware of the corporate bond concentration limit.
Key Entities Referenced
Reserve Bank of India: The central bank of India, which issued this circular.
Foreign Portfolio Investors: Entities investing in Indian financial markets as defined in the context of this policy document.
Foreign Exchange Management Act, 1999: The Act of the Indian Parliament under which the directions in the circular are issued.
Foreign Exchange Management Transfer or Issue of Security by a Person Resident outside India Regulations, 2000: Regulations governing investments by persons resident outside India.
Central Government securities: Debt instruments issued by the Central Government of India.
State Development Loans: Debt instruments issued by the State Governments in India.
Companies Act, 2013: Indian legislation defining related entities.
Mumbai, Maharashtra: City in India, location of the Financial Markets Regulation Department of RBI.
भारतीय �रज़व र् बक�
RESERVE BANK OF INDIA
www.rbi.org.in
RBI/2017-18/170
A.P. (DIR Series) Circular No. 26 May 1, 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 this regard a reference is invited to AP (DIR Series) Circular No. 24 dated April 27, 2018,
notifying changes affecting operational aspects of FPI investments in debt. Paragraph 3 (a) (i) of
the circular announced the withdrawal of the minimum residual maturity requirement for Central
Government securities (G-secs) and State Development Loans (SDLs) categories, subject to
the condition that investment in securities with residual maturity below one 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. Further, in terms of paragraph 3 (a) (ii), FPIs were permitted to invest in corporate
bonds with minimum residual maturity of above one year but no cap on investment in securities
with residual maturity below one year was stipulated for FPI investments in corporate bonds.
3. While the FPIs are only permitted to invest in corporate bonds with minimum residual maturity
of above one year, in order to bring consistency across debt categories, it is stipulated that
investments by an FPI in corporate bonds with residual maturity below one year shall not
exceed, at any point in time, 20% of the total investment of that FPI in corporate bonds.
�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.in4. In addition, the following clarifications are issued with respect to the provisions in the AP
(DIR Series) Circular No. 24 dated April 27, 2018:
(i) FPIs are permitted to invest in treasury bills issued by the Central Government.
(ii) The requirement that investment in securities of any category (G-secs, SDLs or, in
terms of this circular, corporate bonds) with residual maturity below one year shall
not exceed 20% of total investment by an FPI in that category applies, on a
continuous basis. 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 of the security
at the time of purchase by the FPI.
(iii) In case investments in securities with less than one year residual maturity, as on 02
May 2018 (beginning of day), is more than 20% of total investment in any category,
the FPI shall bring such share below 20% within a period of six months from the date
of this circular; however, the FPI shall ensure that no further additions are made to
the portfolio of securities with residual maturity of less than one year as on 02 May
2018 (beginning of day), either through fresh purchases or through roll-down of
investments with current tenor of more than one year, until the share of such portfolio
of securities falls below 20% of the total investment in that category.
(iv) The term “related FPIs” in paragraph 3 (e) (i) of the circular dated April 27, 2018
refers 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.
(v) As regards the concentration limit for an FPI for its corporate bond portfolio to a
single corporate (paragraph 3 (e) (ii) of the circular dated April 27, 2018) the
following clarifications may be noted:
a. The term “related entities” shall have the same meaning as defined in section
2(76) of the Companies Act, 2013.
b. A newly registered FPI would mean FPIs registered after April 27, 2018.
(vi) The implementation date of online monitoring of utilization of G-sec limits has been
set as June 1, 2018. The existing process for monitoring of limits as well as
allocation of limit through auction mechanism will continue in the meantime.
25. 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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