Proposed FPI rule changes: A welcome development

By Sawant Singh and Aditya Bhargava, Phoenix Legal

The regulatory environment for investment in corporate debt by foreign portfolio investors (FPIs) has been turbulent with sweeping changes introduced by the Reserve Bank of India (RBI) in April 2018, followed by other changes introduced on 15 June by both the RBI and the Securities and Exchange Board of India (SEBI). Unlike global financial regulatory rule-making practices, these changes were introduced without the issuance of consultation papers seeking feedback of market participants. These developments, and their manner of introduction, created anxiety among issuers, FPIs and other market participants.

Sawant SinghPartnerPhoenix Legal
Sawant Singh
Phoenix Legal

In view of recent developments in domestic and international financial markets, various measures were considered to improve the flow of foreign investments into India, particularly in corporate debt. These included the easing of rules applicable to FPIs, including relaxing the applicability of the group exposure thresholds (20%) and the per issue investment limit (50% ) that were put in place by the RBI’s and SEBI’s circulars of 15 June.

In its statement on developmental and regulatory policies of 5 October, the RBI stated it would issue a discussion paper on a voluntary retention route (VRR) for FPIs to invest in debt. The statement said that under VRR, FPIs would have more operational flexibility in terms of instruments, as well as exemptions from concentration limits, and group-level and issue-level thresholds. An FPI that voluntarily commits to retain a minimum percentage of its investments in India for a period of its choice would be eligible to participate in this route. FPIs would be able to apply for investment limits for VRR through auctions conducted by the RBI.

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


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