The Reserve Bank of India (RBI) has eased restrictions on investments in debt securities to allow foreign institutional investors (FIIs) to invest in non-convertible debentures (NCDs) and bonds issued by non-banking financial companies (NBFCs).
This applies to FIIs registered with the Securities and Exchange Board of India (SEBI) that invest in NCDs and bonds issued by NBFCs which are categorized as infrastructure finance companies. The relaxation was announced through circular 42, issued on 3 November.
In April, the RBI raised the limit for FII investment in NCDs and bonds issued by Indian companies in the infrastructure sector from US$5 billion to US$25 billion.
The increase was subject to the conditions that the NCDs and bonds would have a residual maturity of five years and above; the investments would have a lock-in-period of three years; and the definition of “infrastructure” would be taken from the extant external commercial borrowings policy.
Then in August, the RBI announced that non-resident investors (other than SEBI-registered FIIs and foreign venture capital investors) who meet SEBI’s know-your-client requirements, could invest up to US$3 billion in units of domestic mutual fund debt schemes which invest in infrastructure debt.
These investors, referred to as qualified foreign investors (QFIs), could invest up to US$3 billion in debt schemes with a minimum residual maturity of five years within the existing ceiling of US$25 billion for FII investment in corporate bonds issued by infrastructure companies.
Through the November circular, the RBI further eased restrictions as follows:
- FIIs are now allowed to invest in NCDs and bonds issued by non-banking financial companies categorized as infrastructure finance companies by the RBI within the overall limit of US$25 billion;
- The lock-in period of three years for FII investment has been reduced to one year for investments of up to US$5 billion within the overall US$25 billion limit. This lock-in period will begin from the time of first purchase by FIIs;
- The stipulated residual maturity of five years and above will now refer to the original maturity of the instrument at the time of first purchase by an FII; and
- Changes (1) and (3) above will also apply to QFI investment in mutual fund debt schemes amounting to a maximum of US$3 billion.
The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at firstname.lastname@example.org. Readers should not act on the basis of this information without seeking professional legal advice.