Circulars on corporate bond investments by foreign portfolio investor (FPIs), issued by the Reserve Bank of India (RBI) on 27 April and 1 May, disconcerted the financial services sector, particularly the provisions restricting investment by a single FPI in a particular bond issue to 50% of the amount of the issue, and limiting the exposure of an FPI to a single body corporate to 20% of the overall corporate bond portfolio of the FPI. FPIs were also perturbed by the lack of clarity and conflicting interpretations of certain provisions.
Despite the RBI’s laudable attempt to deepen the bond market and increase investor participation by relaxing the residual maturity requirements applicable to corporate bond investments by FPIs, bond investments by FPIs seemed to come to a standstill, and various market participants such as investors and intermediaries made representations on the restrictions to the RBI and to the Securities and Exchange Board of India (SEBI), which licenses and regulates FPIs in general.
To alleviate the situation, both the RBI and SEBI issued circulars on 15 June on the regulatory framework for corporate bond investments by FPIs. The RBI’s circular also withdrew the 27 April and 1 May circulars. The 15 June circulars are similarly worded, and are clear in terms of intent and their application to corporate bond investments by FPIs. Most importantly, these circulars provide certain relaxations for corporate bond investments already made by FPIs.
The 15 June circulars confirm that FPIs can invest in corporate bonds with a minimum residual maturity of one year, provided that such investments do not exceed 20% of the FPI’s corporate bond portfolio. The circulars also clarify that an FPI’s investments in corporate bonds with a maturity of one year cannot exceed the 20% limit at the end of any day, but that investments in corporate bonds with a minimum residual maturity of one year may exceed the 20% limit if they were made on or before 27 April.
The RBI’s 27 April and 1 May circulars had limited investment in a single issue by a particular FPI (and its “related” FPIs) to 50% of the issue. The 15 June circulars continue this restriction, but clarify the manner of determining a “related” FPI.
The 15 June circulars also clarify that while an FPI’s exposure to a single body corporate (including entities related to that body corporate) cannot exceed 20% of the FPI’s corporate bond portfolio: (a) if an FPI’s exposure (as on 27 April) to a single body corporate (including entities related to that body corporate) exceeds 20% of the FPI’s corporate bond portfolio, further investments in that body corporate can be made after this condition is fulfilled; (b) fresh investments made after 27 April in a body corporate, other than those referred in (a), would be exempt from the 20% requirement until 31 March, 2019; and (c) FPIs registering after 27 April must comply with the requirement in (a) by 31 March 2019 or within six months of registration (whichever is later). The above are significant relaxations provided to FPIs for their corporate bond investments prior to 27 April, and also clearly establish the prospective application of the revised FPI framework. Investments in security receipts by FPIs are exempt from the 50% per issue and the 20% per issuer limits.
The 15 June circulars introduce exemptions for “pipeline investments”, i.e. investments by FPIs that were being processed but had not materialized on 27 April, and where “major parameters” such as price/ rate, tenor and amount of the investment had been agreed upon between the FPI and the issuer on or before 27 April. Pipeline investments are exempt from the 50% per issue and the 20% per issuer limits, and must be completed by 31 December. The determination of an investment as a “pipeline investment” has been left to the relevant custodian, thus reducing regulatory interface and potential backlog. This exemption has been well received and has had the effect of restarting corporate bond investments by FPIs.
The 15 June circulars appropriately rectify the impact of the 27 April and the 1 May circulars. The clarity in interpretation and regulatory certainty provided by the 15 June circulars is also a welcome relief for investors, issuers and other market participants. However, a more structured process of regulatory rule-making would have avoided the chaos that was created by the initial circulars, and would have also been more becoming of an economy that is looked at as a driver of global economic growth.