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August 22, 2016

RBI Proposes To Expand The Investment Arms For FPIs: Article by Archana Khosla of Vertices Partners


Following the Union Budget 2016-17, RBI plans to expand the investment ambit for FPIs by allowing them to put capital in unlisted debt securities as well as in securitized debt instruments

In a move to accelerate the country's corporate debt market and to attract infusion of global funds into capital markets, the Reserve Bank of India (RBI) has recently proposed to allow Foreign Portfolio Investors (FPIs) to invest in unlisted debt securities and securitised debt instruments.

As per extant rules of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000, FPIs are qualified to invest only in listed or to-be-listed debt securities. Investment in unlisted debt securities is permitted only in case of companies engaged in the infrastructure sector. Also, at present, Investment by FPIs in securitised debt instruments is forbidden.

In this regard, on 29th February 2016, the Finance Minister of India, Mr. Arun Jaitly had presented the Union Budget 2016-17, wherein, inter alia, he had discussed the measures for deepening of Corporate Bond Market. Therein it was announced that "Investment basket of foreign portfolio investors will be expanded to include unlisted debt securities and pass through securities issued by securitisation SPVs."

Following the Union Budget 2016-17, RBI plans to expand the investment ambit for FPIs by allowing them to put capital in unlisted debt securities as well as in securitized debt instruments. Accordingly, RBI has released a draft circular elucidating the proposed directives. 

As per the proposed directive, FPIs can invest in the primary issues of non-convertible debentures/bonds by a public company issued in demat form. However, the said relaxation is fastened with an admonition that borrowing companies cannot employ such bond proceeds for real estate activities, purchase of land, investing in capital market or on-lending to other entities. 

The custodian banks of FPIs shall warrant compliance with this condition based on an undertaking from the issuing company. 

The proposed directives also permit FPIs to invest in select cluster of debt instruments passed on to other borrowers, known as 'Securitised Debt Instruments' in market parlance. According to the proposal, FPIs can invest in any certificate or instrument issued by a special purpose vehicle (SPV) set up for securitisation of asset/s where banks, financial institutions or non-banking finance companies are originators; and any certificate or instrument issued and listed in terms of the SEBI 'Regulations on Public Offer and Listing of Securitised Debt Instruments, 2008'.

The said proposal, if implemented, is expected to aid in the development of corporate bond market and to pull more foreign funds into capital markets.

Archana Khosla is founder partner, Vertices Partners

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house


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