RBI/2017-18/199
A.P. (DIR Series) Circular No. 31
June
15, 2018
To
All Authorized Persons
Madam / Sir
Investment
by Foreign Portfolio Investors (FPI) in Debt - Review
Attention of Authorised Dealer
Category-I (AD Category-I) banks is invited to Schedule 5 to the 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, as
amended from time to time and the relevant directions issued thereunder.
2. A reference is also invited
to AP (DIR Series) Circular No. 22 dated
April 6, 2018, AP (DIR Series) Circular No. 24 dated April 27, 2018,
and AP (DIR Series) Circular No. 26 dated May 1, 2018, on the captioned
subject.
3. Based on the feedback
received from custodians, FPIs and other stakeholders, it has been decided
to provide some operational flexibility as well as transition path for FPIs
and custodians to adapt to these regulations.
4. Accordingly, in supercession
of the directions contained in AP (DIR
Series) Circular No. 24 dated April 27, 2018 and AP (DIR Series) Circular No. 26 dated May 1, 2018,
the following directions are issued:
(a) Definitions
i.
“Short-term
investments” are defined as investments with residual maturity up to one
year;
ii.
The
term “related FPIs” shall mean ‘investor group’ as defined in Regulation
23(3) of SEBI (Foreign Portfolio Investors) Regulations, 2014;
iii.
The
term “entities related to the corporate” shall have the meaning assigned to
‘related party’ in section 2(76)(viii) of the Companies Act, 2013. Issuers
that are owned or controlled by the Government of India or State
Governments shall be exempted from the definition of “entities related to
the corporate”;
iv.
“SRs”
mean Security Receipts issued by Asset Reconstruction Companies;
v.
“Multilateral
Financial Institutions” mean FPIs which are Multilateral Financial
Institutions in which Government of India is a member.
(b) Revision of minimum residual
maturity requirement
(i) In terms of A.P. (DIR Series) Circular No. 13 dated July 23, 2014,
FPIs were required to invest in Government bonds with a minimum residual
maturity of three years. Henceforth, FPIs are permitted to invest in
Central Government securities (G-secs), including in Treasury Bills, and
State Development Loans (SDLs) without any minimum residual maturity
requirement, subject to the condition that short-term investments by an FPI
under either category shall not exceed 20% of the total investment of that
FPI in that category.
(ii) In terms of A.P. (DIR Series) Circular No. 71 dated February 03,
2015, FPIs were required to invest in corporate bonds with a minimum
residual maturity of three years. Henceforth, FPIs are permitted to invest
in corporate bonds with minimum residual maturity of above one year,
subject to the condition that short-term investments in corporate bonds by
an FPI shall not exceed 20% of the total investment of that FPI in
corporate bonds. These stipulations would not apply to investments in SRs
by FPIs.
(iii) The requirement that
short-term investments shall not exceed 20% of total investment by an FPI
in any category applies on an end-of-day basis. At the end of any day, all
investments with residual maturity of up to one year will be reckoned for
the 20% limit.
(iv) Short-term investments by
an FPI may exceed 20% of total investments, only if the short-term
investments consist entirely of investments made on or before April 27,
2018; that is, short-term investments do not include any investment made
after April 27, 2018.
(c) Revision of security-wise
limit
The cap on aggregate FPI
investments in any Central Government security, currently at 20% of the
outstanding stock of that security, in terms of A.P. (DIR Series) Circular No. 19 dated October 6, 2015,
stands revised to 30% of the outstanding stock of that security.
(d) Online monitoring of
investments in G-sec and SDL Categories
i.
FPIs
were permitted to invest in G-secs till the limit utilization reaches 90%,
after which the auction mechanism was triggered for allocation of the
remaining limit. With Clearing Corporation of India Ltd. (CCIL) commencing
online monitoring of utilisation of G-sec limits, the auction mechanism has
been discontinued with effect from June 1, 2018.
ii.
Utilisation
of FPI investment limits in G-secs and SDLs is being monitored online by
the Clearing Corporation of India Ltd. (CCIL). Any transactions in breach
of the investment limit in each category will not be accepted. Custodians
and FPIs may note that any transaction that leads to a breach of the
investment limit for the category will need to be reversed.
iii.
Upon
sale/redemption of securities (in G-secs and SDLs), the concerned FPIs may
reinvest within a period of two working days from the date of
sale/redemption (including date of sale/redemption). If the reinvestment is
not made within that time period, reinvestment shall be subject to
availability of limits for that category.
iv.
The
primary responsibility of complying with all limits for investment in
G-secs and SDLs viz., investment utilization limit, security wise limit in
G-secs, concentration limit and minimum residual maturity requirement shall
lie with the FPIs and custodians.
v.
CCIL
will also monitor the various other limits and caps for FPI investment in
G-secs and SDLs. The operationalisation of the same will be notified by
CCIL.
(e) Concentration limit
Investment by any FPI (including
investments by related FPIs), in each of the three categories of debt,
viz., G-secs, SDLs and corporate debt securities, shall be subject to the
following concentration limits:
(i) Long-term FPIs: 15% of
prevailing investment limit for that category.
(ii) Other FPIs: 10% of
prevailing investment limit for that category.
(iii) In case an FPI has
investments (INV0) in excess of the concentration limit on the effective
date (date on which these concentration limits come into existence), it
will be allowed the following relaxations, subject to availability of
overall category limits, as a one-time measure:
a.
In
case an FPI has investments (INV0) in excess of the concentration limit on the effective
date, it will be allowed to undertake additional investments such that its
portfolio size at the end of any day (INVt) does
not exceed INV0 plus 2.5% of investment limit for
the category on the effective date. Once INVt falls
below the prevailing concentration limit for the category, the FPI shall be
free to make investments up to the applicable concentration limit.
b.
In
case an FPI has investments (INV0) within the concentration limit, but in excess of 7.5%
(12.5% in case of FPIs in the ‘Long-term’ sub-category) of the investment
limit for the category on the effective date, that FPI shall be allowed to
undertake additional investments such that its portfolio size at the end of
any day (INVt) does not exceed INV0 plus 2.5%
of the investment limit for the category on the effective date. Once INVt falls
below the prevailing concentration limit for the category, the FPI shall be
free to make investments up to the applicable concentration limit.
c.
All other
FPIs will be allowed to invest up to the applicable concentration limit.
(f) Single/Group investor-wise
limits in corporate bonds
FPI investment in corporate
bonds shall be subject to the following requirements:
(i) Investment by any FPI,
including investments by related FPIs, shall not exceed 50% of any issue of
a corporate bond. In case an FPI, including related FPIs, has invested in
more than 50% of any single issue, it shall not make further investments in
that issue until this stipulation is met.
(ii) No FPI shall have an
exposure of more than 20% of its corporate bond portfolio to a single
corporate (including exposure to entities related to the corporate).
a.
In
case an FPI has, as on April 27, 2018, exposure in excess of 20% to any
corporate (including exposure to entities related to the corporate), it
shall not make further investments in that corporate until this requirement
is met.
b.
‘New’
investments (i.e., investments made after April 27, 2018 in corporates other
than those referred to in para ‘4(f)(ii)a.’ above) by FPIs would be
exempted from this requirement till March 31, 2019. These ‘new’ investments
will, however, have to comply with this requirement thereafter.
c.
To
facilitate newly registered FPIs to build up a diversified portfolio, FPIs
registering after April 27, 2018 are permitted to comply with this
requirement by March 31, 2019, or six months from the date of registration,
whichever is later.
(iii) The requirements of
single/group investor-wise limits in corporate bonds (para 4(f)(i) and para
4(f)(ii) above) would not be applicable to investments by Multilateral
Financial Institutions and investments by FPIs in SRs.
(g) Pipeline investments in
corporate bonds
(i) Investment transactions by
FPIs in corporate bonds that were under process but had not materialized as
on April 27, 2018 (pipeline investments), shall be exempt from the
requirements specified in paragraphs 4(f)(i) and 4(f)(ii) of this circular,
subject to the custodian of the FPI reasonably satisfying itself that:
a.
the
major parameters such as price/rate, tenor and amount of the investment
have been agreed upon between the FPI and the issuer on or before April 27,
2018;
b.
the
actual investment will commence by December 31, 2018; and
c.
the
investment is in conformity with the extant regulations governing FPI
investments in corporate bonds prior to April 27, 2018.
(ii) Custodians may, based on
their assessment of adherence to the above conditions, permit, or not
permit, as the case may be, pipeline investments by FPIs without reference
to the Reserve Bank.
(h) Other changes
No FPI shall invest in partly
paid debt instruments.
5. These directions would be
applicable with immediate effect. The directions contained in AP (DIR Series) Circular No. 24 dated April 27, 2018 and AP (DIR Series) Circular No. 26 dated May 1, 2018 stand
withdrawn.
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.
Yours
faithfully
(T.
Rabi Sankar)
Chief General Manager
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