Revised Voluntary Retention Route for FPI investment in Debt

The Reserve Bank of India (‘RBI’) has, by way of its circular dated May 24, 2019, notified a revised voluntary retention route (‘VRR’), which was previously introduced on March 1, 2019 as a separate scheme for investments by foreign portfolio investors (‘FPIs’) in Indian debt markets.

i.          RBI had earlier prescribed the following categories of investments, with a separate investment limit specified for each:

(a)      VRR-Govt.: Under this route, FPIs could subscribe to all types of Government securities available under the general investment route viz., G-Secs, T-bills and SDLs; and

(b)      VRR-Corp.: Under this route, FPIs could subscribe to certain instruments available for investments by FPIs under Schedule 5 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 (‘TISPRO Regulations’) (i.e. commercial papers / non-convertible debentures / bonds issued by an Indian company, security receipts issued by asset reconstruction companies, etc.).

ii.       A third category of investment has now been introduced, called ‘VRR-Combined’. Under this, FPIs can invest in securities permissible under both VRR-Govt. and VRR-Corp. categories, which has a combined investment limit of Rs. 75,000 crores (approx. USD 10.75 billion) which may be allocated by the RBI amongst the three categories, from time to time. The RBI has, as on May 24, 2019, opened up investment limits for the VRR-Combined category for an amount of approx. Rs. 54,600 crores (approx. USD 7.8 billion).

iii.     Earlier, the limits for investment were first offered for allotment ‘on tap’ between March 11, 2019 and April 30, 2019 on a ‘first-come-first-served’ basis. The tap has now been opened on a ‘first-come-first-served’ basis until the earlier of (a) the limit being fully allotted; or (b) December 31, 2019. An auction process will be implemented if there is a demand for more than 100% of the amount offered.

iv.      The concerned FPI is required to invest and keep invested 75% of committed portfolio size (‘CPS’) being the amount allotted to it (on an end-of-day basis), within 3 months from the date of allotment. Under the earlier regime, the concerned FPI was required to invest 25% of the CPS within one month of allotment and the balance 50%, within 3 months of allotment.

v.       While an FPI can open a separate security account for holding debt securities under this route, it is no longer mandatorily required to do so.