FPI: STRUCTURING DEBT IN INDIA
Updated: Feb 21
Author: Weindrila Sen, III year of LL.B. from SVKM's JCCL, Mumbai University
Co-author: Aarushi Pandey, III year of LL.B. from Government Law College, Mumbai University
Investment done through Foreign Portfolio Investor (hereinafter referred to as “FPI”) is a form of investment whereby an investor invests in a foreign country through various instruments like bonds, mutual funds, stocks, etc. FPI investment in a country also determines the market condition of the investee country because a foreign investor will only invest when they see potential growth in their investments. Economically speaking, more foreign investment inflow will ensure the appreciation of the rupee value against the Dollar. FPI has been one of the most preferred routes of Foreign Direct Investment (hereinafter referred to as “FDI”) in India. It was introduced after merging two existing modes of investments namely the Foreign Institutional Investor and Qualified Foreign Investor. FPI has enhanced the debt investment in the last few years, so let us take a look into the basics of FPI and how it has helped in shaping India’s debt structure.
FPI, at its very outset, lays down two categories[i] of investors and any applicant can obtain a license from SEBI under any of the two categories. Category I relates to government-related investors, appropriately regulated companies, university funds, etc., and Category II relates to corporate bodies, family offices, individuals, appropriately regulated funds that are not eligible under Category-I, etc.
The routes of investment can be further classified into two categories i.e. - General Investment Route (hereinafter referred to as “GIR”) and Voluntary Retention Route (hereinafter referred to as “VRR”). In addition to GIR, the government has introduced VRR as a new route of investment under FPI in 2019. VRR has been introduced to provide more flexible regulations governing debt investment for FPIs to retain them for a longer period.
GIR was the sole existing route for FPIs to invest in debt instruments in India before 2019. With the amendment issued via circular dated 23 January 2020[ii], the RBI has increased the permissible debt investment level for FPIs to ensure more flow of funds. FPIs are now allowed to invest up to 30% from 20% earlier cap in Government Securities (G-secs) including Treasury Bills (T-bills) and State Development Loans (hereinafter referred to as “SDLs''). These investments can be done without any residuary maturity requirement provided that such short-term investment should not exceed 30% of the total investment of FPI in any specific category. RBI has further allowed FPIs to invest up to 30% from an earlier cap of 20% in corporate bonds (listed/unlisted/ to be listed) with a minimum residual maturity of over one year. Investment in exempted securities will not be a part of the prescribed cap mentioned above. RBI has also increased the overall cap limit of investment in Central Government securities from earlier 20% to 30% of the outstanding stock of the said security. Further investment of a single FPI or related FPIs is now allowed up to 50% of any issue of corporate bonds only to avoid any concentration of holding. With the circular dated 25 April 2019[iii], RBI has further permitted FPI investment in municipal bonds within the limits set for SDLs. These amendments clearly show the intention of attracting more FPIs for short-term investment into the debt market in India. The increase in the thresholds of various debt instruments will now enable the FPIs investing through GIR to have a better and flexible debt portfolio.
As mentioned earlier, the government has recently introduced a new route named VRR for FPIs debt investment in India. The objective of introducing this route is to attract more long term and stable FPIs debt investment in India. VRR[iv] is free from macro prudential and regulatory norms usually applicable to FPIs thus making it a more flexible option for investors.
Investments under the VRR route are further classified into the following three categories: - VRR-Govt. (for investment in Government Securities), VRR-Corp. (for investment in Corporate Debt Instruments) and VRR-Combined (for mixed investments in government securities and corporate debt instruments).
Any FPI registered with SEBI is eligible to participate through this channel. All transactions through an FPI will be done via Special Non-Resident Rupee Account (SNRR ac.) and FPI may open a separate account for holding its debt security.
The amount of allotment under VRR-Govt and VRR-Corp will be allocated by the RBI individually. The FPI needs to maintain a ‘Committed Portfolio Size’ (hereinafter referred to as “CPS”), which requires the FPI to invest money in its debt securities for a minimum retention period of three years (may also vary depending upon the allotment). This decision has been successful in attracting and retaining long term debt investment in India. Even after the impact of COVID-19 investments through FPI have been to the tune of Rs. 41,330 crores in August 2020[v].
For facilitating long-term debt investments RBI declared a minimum retention period and no FPIs are allowed to bid for a term lower than that. All the allotment under VRR is done through auction and upon successful allotment of bids the FPI needs to invest 75% of its funds within three months from the start of the commencement period. RBI has fixed the minimum investment portion and period to ensure the early and maximum flow of funds towards the dedicated debt instrument.
Further to ensure that no FPI repatriates their investment before the expiry of the minimum retention period, RBI has mandated the selling of investment to a fellow FPI or FPIs during such said period. To discourage repatriation of funds from debt investment even after the exhaustion of the minimum retention period, RBI has also allowed FPIs to shift their investment route from VRR to GIR to obtain a shorter investment cycle or to hold its investment until the date of maturity or until the day it’s sold (whichever is earlier).
With the amendment circular dated 23 January 2020, RBI has increased the FPI cap to Rs 1,50,000 crores. from Rs 75,000 crores. to shoot up FPI investment into the debt market in India. The government has also allowed investors to invest in Exchange-Traded Funds. The FPI also needs to appoint a custodian who will look after the adherence of various stated limits and required regulatory compliances. The custodian shall also overlook and ensure that no funds are repatriated if it falls below 75% of CPS, during the retention period.
The Indian Government has taken various measures over time to facilitate the growth of FPIs in India. But the unprecedented pandemic had a substantial impact on the foreign investment through FPI, thus heavily impacting the debt market. According to various reports and news articles, the foreign investors pulled out Rs. 1.1 lakh crores in March 2020[vi] and Rs 6,125 crores from the Indian debt market in April 2020. This came after six months of continuous investments. But, as the Indian market showed resilience and the work resumed, India regained its position as an attractive investment market. By the end of December, 2020[vii] investments through VRR stood at Rs. 25,223.73 crores and overall investments (including equity and debt) stood at Rs. 1,03,158.04 crores. According to the most recent data by National Securities Depository Limited, the investment through FPI in January 2021 stood at Rs. 14,631.21 crores. Many investors have pulled out their investments in anticipation of the 2021 budget to be declared on 1st Feb 2021[viii].
Industry experts say that the foreign investments in the debt market will start pouring in after the declaration of the budget. Also, since SEBI has approved non-convertible debentures as a mode of debt funding, the economy has experienced a substantial rise in investments through this route as well. There have been over 10 public issues[ix] of NCDs since 2020. Several M&A transactions are also relying on NCDs for funding their transactions[x]. There has been a rise in investment through this route making it one of the most preferred FDI routes for debt investment. All of this shows that FPIs are a great source of investment in India’s debt market. RBI and other appropriate authorities have also taken efforts to provide for an investment-friendly regulatory environment so that it can foster more long term as well as short term debt investments through this route in India.