Bond investment guidelines a relief for foreign investors

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.

Sawant Singh and Aditya Bhargava are partners at the Mumbai office of Phoenix Legal.