Foreign portfolio investors: New bond rules a surprise

The foreign portfolio investor (FPI) framework introduced in 2014 was welcomed as a prime example of regulatory streamlining. However, the framework has presented challenges, particularly for investments in Indian corporate debt. Until recently, corporate debt investments by FPIs were regulated by a series of circulars issued by the Reserve Bank of India (RBI) in 2015. The 2015 circulars were recast by circulars issued by the RBI on 27 April and 1 May.

Although the RBI had signalled in October 2017 that it would undertake a “detailed review” of the regulatory framework on debt investment by FPIs, and had dropped a similar hint in a 6 April circular, the 2018 circulars have caught FPIs and other stakeholders unawares.

The April circular permits FPIs to invest in corporate debt with a residual maturity of one year, compared with three years previously. The May circular clarifies that FPIs can invest in corporate debt with a residual maturity of less than one year subject to such investments not exceeding 20% of the total investment of FPIs in corporate bonds. The April circular also introduces concentration thresholds, where investment by long-term FPIs is capped at 15% of the prevailing investment limit for FPIs, and the investment of other FPIs is capped at 10% of the prevailing investment limit for FPIs.

The April circular also introduces single and group investor limits, where investment by an FPI (including its related FPIs) must not exceed 50% of any issue of corporate bonds. While “related” was not defined in the April circular, the May circular clarifies that the term refers to “all FPIs registered by a non-resident entity”, and provides an example: “Illustratively, if a non-resident entity has set up five funds, each registered as an FPI for investment in debt, total investment by the five FPIs will be considered for application of concentration and other limits.”

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