Mumbai: The Reserve Bank of India (RBI) on Friday proposed new norms for foreign portfolio investors (FPIs) to attract long-term and stable FPI investments into debt markets while allowing them operational flexibility.

The central bank, in consultation with the government and the Securities and Exchange Board of India (Sebi), has proposed a special route called voluntary retention route (VRR) to encourage FPIs willing to make long-term investments in debt.

According to the proposal, foreign portfolio investors will be exempt from regulatory provisions, but will have to voluntarily commit to retain in India a minimum required percentage of their investments for a period of their choice.

“Broadly, investments through the route will be free of the macro-prudential and other regulatory prescriptions applicable to foreign portfolio investments in debt markets, provided foreign portfolio investors voluntarily commit to retain a required minimum percentage of their investments in India for a period of their choice. Participation through this route will be entirely voluntary," RBI said in a discussion paper.

Any entity registered as a foreign portfolio investor with Sebi is eligible to participate through VRR.

The total amount that may be invested through the route will be stipulated by RBI from time to time.

The minimum retention period shall be three years, or as decided by RBI for each auction.

The total amounts for investment through VRR will be separately indicated for government securities (central government securities as well as state development loans, (VRR-Govt) and corporate debt (VRR-Corp) and will be allocated through an auction process.

“A foreign portfolio investor will be required to invest a minimum of 67% of the committed portfolio size (CPS) within the one-month period," said RBI.

Under VRR-Govt, foreign portfolio investors will be eligible to invest in any government security, including treasury bills. Similarly, under VRR-Corp, FPIs may invest in corporate debt instruments, including commercial papers.

Foreign portfolio investors investing through VRR will be eligible to participate in repos for liquidity management, provided that the amount borrowed or lent under repo does not exceed 10% of their investment under VRR.

Foreign portfolio investors will be allowed to participate in any currency and interest rate derivative instrument, OTC or exchange traded, to hedge their interest rate or currency risk.

Bhavin Shah, partner, financial services tax leader, PricewaterhouseCoopers Pvt Ltd, said the relaxation will encourage investment in stressed companies, where there is a great need of fresh debt investment to turn them around.

“FPI investment in corporate debt was in the range of $8 billion to $9 billion between January 2014 till June 2017. The additional investment dried up after introduction of concentration norms in April 2018. With proposed relaxation, one can expect significant dollar flows into the country, which will partly help to ease pressure on the depreciating rupee," he said

Foreign institutional investors (FIIs) have been fleeing Indian markets this year, with a sharp sell-off seen in the debt segment compared to the equity markets. In the year so far, FIIs have sold $9,740.6 million in debt and $2,495.61 million in Indian shares.

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