A.P. (DIR Series) Circular No. 21
All Authorized Persons
Madam / Sir
Retention Route’ (VRR) for Foreign Portfolio Investors (FPIs) investment in
Attention of Authorised Dealer
Category-I (AD Category-I) banks is invited to the following regulations,
as amended from time to time, and the relevant directions issued under
Exchange Management (Permissible Capital Accounts Transactions)
Regulations, 2000 notified vide Notification
No. FEMA 1/2000-RB dated May 03, 2000;
Exchange Management (Borrowing and Lending) Regulations, 2018 notified
vide Notification No. FEMA 3(R)/2018-RB dated
December 17, 2018;
Exchange Management (Transfer or Issue of Security by a Person Resident
outside India) Regulations, 2017 notified vide Notification No. FEMA.20(R)/2017-RB dated November 07, 2017;
Exchange Management (Foreign Exchange Derivative Contracts) Regulations,
2000 notified vide Notification No. FEMA
25/RB – 2000 dated May 03, 2000.
2. A reference is also invited
to the discussion paper on
‘Voluntary Retention Route’ (VRR) for investments by Foreign Portfolio
Investors (FPIs) released by the Reserve Bank on October 05, 2018. The VRR
scheme has been finalized after taking into consideration the comments and
views received, and attached as Annex.
3. Suitable amendments have been
made to regulations under the Foreign Exchange Management Act, 1999 (Act 42
of 1999) to enable FPIs participating in the VRR scheme to hedge their
interest rate and exchange rate risks related to their investments under
the scheme and to undertake repo/reverse repo transactions to meet their liquidity
requirements. A copy of the following amendments notified in the Official
Gazette is enclosed.
No. FEMA 390/2019-RB dated February 26, 2019 (GSR.
No 161 (E) dated February 27, 2019);
No. FEMA 391/2019-RB dated February 26, 2019 (GSR.
No 162 (E) dated February 27, 2019);
No. FEMA 3 (R)1/2019-RB dated February 26, 2019 (GSR.
No 163 (E) dated February 27, 2019); and
No. FEMA 20 (R)5/2019-RB dated February 26, 2019 (GSR.
No 164 (E) dated February 27, 2019)
4. A reference is also invited
to A.P. (DIR Series) Circular No. 22 dated
March 01, 2019 on hedging of exchange rate risk by Foreign
Portfolio Investors under Voluntary Retention Route, issued today (March
5. These directions shall be
applicable with immediate effect.
6. The directions contained in
this circular have been issued under sections 10(4) and 11(1) of the
Foreign Exchange Management Act, 1999 (42 of 1999) and are without
prejudice to permissions/ approvals, if any, required under any other law.
Chief General Manager
Retention Route’ (VRR) for Foreign Portfolio Investors (FPIs) investment
The Reserve Bank, in
consultation with the Government of India and Securities and Exchange Board
of India (SEBI), introduces a separate channel, called the ‘Voluntary
Retention Route’ (VRR), to enable FPIs to invest in debt markets in India.
Broadly, investments through the Route will be free of the macro-prudential
and other regulatory norms applicable to FPI investments in debt markets,
provided FPIs voluntarily commit to retain a required minimum percentage of
their investments in India for a period. Participation through this Route
will be entirely voluntary. The features of the Route are explained below
i. ‘Committed Portfolio Size’
(CPS), for an FPI, shall mean the amount allotted to that FPI.
ii. ‘General Investment Limit’,
for any one of the three categories, viz., Central Government Securities,
State Development Loans or Corporate Debt Instruments, shall mean FPI
investment limits announced for these categories under the Medium Term
Framework, in terms of A.P. (DIR Series)
Circular No. 22 dated April 6, 2018, as modified from time to time.
iii. ‘Minor violations’ shall
mean violations that are, in the considered opinion of the custodians,
unintentional, temporary in nature or have occurred on account of reasons
beyond the control of FPIs, and in all cases are corrected on detection.
iv. ‘Related FPIs’ shall mean
‘investor group’ as defined in Regulation 23(3) of SEBI (Foreign Portfolio
Investors) Regulations, 2014.
v. ‘Repo’ shall have the same
meaning as defined in Section 45U (c) of RBI Act, 1934; and for the purpose
of this regulation excludes repo conducted under the Liquidity Adjustment
Facility and the Marginal Standing Facility.
vi. ‘Retention Period’ shall
mean the time period that an FPI voluntarily commits for retaining the CPS
vii. ‘Reverse Repo’ shall have
the same meaning as defined in Section 45U (d) of RBI Act, 1934; and for
the purpose of this regulation excludes reverse repo conducted under the
Liquidity Adjustment Facility and the Marginal Standing Facility.
viii. ‘VRR-Corp’ shall mean
Voluntary Retention Route for FPI investment in Corporate Debt Instruments.
ix. ‘VRR-Govt’ shall mean
Voluntary Retention Route for FPI investment in Government Securities.
3. Eligible investors
Any FPI registered with SEBI is
eligible to participate through this Route. Participation through this
Route shall be voluntary.
4. Eligible instruments
VRR-Govt, FPIs will be eligible to invest in any Government Securities
i.e., Central Government dated Securities (G-Secs), Treasury Bills
(T-bills) as well as State Development Loans (SDLs). Under VRR-Corp, FPIs
may invest in any instrument listed under Schedule 5 of Foreign Exchange Management
(Transfer or Issue of Security by a Person Resident outside India)
Regulations, 2017 notified vide Notification
No. FEMA.20(R)/2017-RB dated November 07, 2017, other than those
specified at 1A(a) and 1A(d) of that Schedule.
transactions, and reverse repo transactions.
a. Investment through this Route
shall be in addition to the General Investment Limit. Investment under this
route shall be capped at Rs.40,000 crore for VRR-Govt and Rs.35,000 crore
for VRR- Corp per annum, or such higher amount, as may be decided by the
Reserve Bank from time to time. The investment limit shall be released in
one or more tranches.
b. Allocation of investment
amount to FPIs under this Route shall be made on tap or through auctions.
Details of the auction mechanism are given in Appendix.
c. The mode of allotment, allocation
to VRR-Govt and VRR-Corp categories and the minimum retention period shall
be announced by the Reserve Bank ahead of allotment.
d. No FPI (including its related
FPIs) shall be allotted an investment limit greater than 50% of the amount
offered for each allotment by tap or auction in case there is a demand for
more than 100% of amount offered.
e. The minimum retention period
shall be three years, or as decided by RBI for each allotment by tap or
f. FPIs shall invest the amount
allocated, called the Committed Portfolio Size (CPS) in the relevant debt
instruments and remain invested at all times during the voluntary retention
period, subject to the following relaxations:
minimum investment of an FPI during the retention period shall be 75% of
the CPS (The flexibility for modulating investments between 75%-100% of CPS
is intended to enable FPIs to adjust their portfolio size as per their
required investment amount shall be adhered to on an end-of-day basis. For
this purpose, investment shall include cash holdings in the Rupee accounts
used for this Route.
g. Amounts of investment shall
be reckoned in terms of the face value of securities.
6. Management of portfolio
allottees are required to invest 25% of their CPS within one month and the
remaining amount within three months from the date of allotment. The
retention period will commence from the date of allotment of limit.
to the end of the committed retention period, an FPI, if it so desires, may
opt to continue investments under this Route for an additional identical
retention period. In that case, it shall convey this decision to its
case an FPI decides not to continue under VRR at the end of the retention
period, FPI may liquidate its portfolio and exit, or it may shift its
investments to the ‘General Investment Limit’. This shifting would be
subject to availability of limit under the ‘General Investment Limit’.
that wish to liquidate their investments under the Route prior to the end
of the retention period may do so by selling their investments to another
FPI or FPIs. However, the FPI (or FPIs) buying such investment shall abide
by all the terms and conditions applicable to the selling FPI under the
violation by FPIs shall be subjected to regulatory action as determined by
SEBI. FPIs are permitted, with the approval of the custodian, to regularize
minor violations immediately upon notice, and in any case, within five
working days of the violation. Custodians shall report all non-minor
violations as well as minor violations that have not been regularised to
7. Other relaxations
made through the Route shall not be subject to any minimum residual
maturity requirement, concentration limit or single/group investor-wise
limits applicable to corporate bonds as specified in paragraphs 4(b), (e)
and (f) respectively of A.P. (DIR Series)
Circular No. 31 dated June 15, 2018.
from investments through the Route may be reinvested at the discretion of
the FPI. Such investments will be permitted even in excess of the CPS.
8. Access to other facilities
investing through the Route will be eligible to participate in repos for
their cash management, provided that the amount borrowed or lent under repo
shall not exceed 10% of their investment under VRR.
investing under this route shall be eligible to participate in any currency
or interest rate derivative instrument, OTC or exchange traded, to manage
their interest rate risk or currency risk.
9. Other operational aspects
of limits and adherence to other requirements of this Route shall be the
responsibility of both the FPI and its custodian.
shall not permit any repatriation from the cash accounts of an FPI, if such
transaction leads to the FPI’s assets falling below the minimum stipulated
level of 75% of CPS during the retention period.
shall have in place appropriate legal documentation with FPIs that enables
them (custodians) to ensure that regulations under VRR are adhered to.
shall open one or more separate Special Non-Resident Rupee (SNRR) account
for investment through the Route. All fund flows relating to investment
through the Route shall reflect in such account(s).
shall also open a separate security account for holding debt securities
under this Route.
process for allocation of investment amount under VRR
The auction process for
allotment of investment amounts under VRR shall be as under:
a. An FPI shall bid two
variables - the amount it proposes to invest and the retention period of
that investment, which shall not be less than the minimum retention period
applicable for that auction.
b. FPIs are permitted to place
c. The criterion for allocation
under each auction shall be the retention period bid in the auction.
d. Bids will be accepted in
descending order of retention period, the highest first, until the amounts
of accepted bids add up to the auction amount.
e. Allotment at margin (i.e., at
the lowest retention period accepted), in case the amount bid at margin is
more than the amount available for allotment, shall be as below:
marginal bid shall be allocated partially such that the total acceptance
amount matches the auction amount.
case there are more than one marginal bids, allocation shall be made to the
bid with the largest amount, and then in descending order of amount bid
until the acceptance amount matches the auction amount.
case the amount offered is the same for two or more marginal bids, the
amount will be allocated equally.
f. If an FPI has been allotted
multiple bids in an auction, the CPS shall be reckoned for each bid separately.
g. FPI which has got CPS
allocated under an auction will be eligible to participate in subsequent
auction as well.