New avenues open for portfolio investment in debt

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The Reserve Bank of India (RBI), via a notification dated 17 November 2016, amended the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000, to allow foreign portfolio investors (FPIs) to invest in unlisted debt securities in the form of non-convertible debentures or bonds issued by public or private companies. Subscription to such securities will be subject to a minimum residual maturity of three years and end-use restrictions applicable to foreign investments in real estate business, the capital market and purchase of land.

Arrows,_target_investmentThe amended regulations also allow foreign portfolio investment in any instrument issued by a special purpose vehicle set up for securitization of assets where banks, financial institutions or non-banking financial companies are the originators of such assets.

Investments by FPIs in unlisted debt securities and securitized instruments have been capped at ₹350 billion (US$5.2 billion), which is within the extant investment limits prescribed for corporate bonds of ₹2.44 trillion.

The above amendments give effect to the government’s intention to expand the investment basket of eligible instruments for investment by FPIs under the corporate bond route, as announced in the 2016-17 budget.

The business law digest is compiled by Nishith Desai Associates (NDA). NDA is a research-based international law firm with offices in Mumbai, New Delhi, Bengaluru, Singapore, Silicon Valley and Munich. It specializes in strategic legal, regulatory and tax advice coupled with industry expertise in an integrated manner.