Corporate bond investment limits: Changes make sense

On 20 July, foreign portfolio investors (FPIs) and investors in rupee denominated bonds (RDBs) got an unwelcome surprise in the form of a circular from the Securities and Exchange Board of India (SEBI) that effectively halted the subscription of corporate debt by FPIs and other foreign investors. But twin late-September moves by SEBI and the Reserve Bank of India (RBI) have restored some level of certainty for FPIs and foreign investors as well as Indian borrowers.

By way of background, a circular from SEBI on 4 August 2016 had established the limit up to which FPIs and other foreign investors could subscribe to corporate debt as ₹2.44 trillion, being roughly the rupee equivalent of US$51 billion (the then prevailing limit). SEBI’s 20 July circular prescribed that when investments in corporate debt (including RDBs) reach 95% of the prescribed limit: (a) depositories would be required to halt all subscription to corporate debt; and (b) such investments could then only be made on the basis of corporate bond investment limits made available to FPIs and foreign investors based on auctions conducted by the National Stock Exchange and the Bombay Stock Exchange.

The 20 July circular further required the temporary ceasing of issuance of RDBs until corporate bond investment limits dropped to 92% of the prescribed limit. The circular also prescribed the mechanism for such auctions as well as certain other criteria such as the maximum amount (of the auctioned limit) that could be held by an FPI.

Sawant Singh and Aditya Bhargava are partners at the Mumbai office of Phoenix Legal.