from India Tax & Regulatory Services Voluntary Retention Route for investment in Indian debt by Foreign Portfolio Investors March 4, 2019 In brief The Reserve Bank of India (RBI) with a view to attract long-term and stable Foreign Portfolio Investors (FPI) investments into debt markets while providing operational flexibility to FPIs to manage their investments, had issued a discussion paper on 5 October, 2018 proposing a special channel called Voluntary Retention Route (VRR/ route) for FPIs. Based on comments received from the public and representations made by various industry participants, the RBI has released a circular 1 finalising the VRR scheme, to boost foreign investment in Indian debt markets. Further, the RBI issued a circular 2 on the hedging of the exchange rate risk by FPIs investing under VRR. In detail The RBI, in consultation with the Government of India and the Securities and Exchange Board of India (SEBI), has introduced a separate channel, called the VRR, to enable FPIs to invest in debt markets in India. Investments through VRR would be free of the macro-prudential and other regulatory norms applicable to FPI investments in debt markets. Details of the VRR scheme are as follows: Eligible investors are FPIs. Participation through this route is voluntary. Investment under the VRR scheme shall be open for allotment from 11 March, 2019. Investments made through VRR shall not be subject to any minimum residual maturity requirement (cap on short-term investments at 20% of portfolio size), concentration limit or single/ group investorwise limits applicable to corporate bonds (50% of a single issue) as specified in circular no. 31 3 issued by RBI (modified from time to time). Investment through VRR shall be in addition to the general investment limit (GIL) and shall be capped at INR 400 billion for VRR in Government Securities (VRR-Govt.) and INR 350 billion for VRR in corporate debt instrument (VRR- Corp) per annum, or such higher amount, as may be decided by RBI from time to time. Investment limits shall be available on tap for investments and shall be allotted by the Clearing Corporation of India Limited (CCIL) on firstcome, first-served basis. The investment limits under the current tranche shall be kept open till the limits are exhausted or till 30 April, 2019, whichever 1 A.P. (DIR Series) Circular No. 21 dated 1 March, 2019 2 A.P. (DIR Series) Circular No. 22 dated 1 March, 2019 3 A.P. (DIR Series) Circular No. 31 dated 15 June, 2018. To refer to our News flash dated 15 June, 2018 please click here. www.pwc.in
is earlier. FPIs desirous of investing may apply online to CCIL through their respective custodians. Income from investments through this route may be reinvested at the discretion of the FPI. Such investments will be permitted even in excess of the committed portfolio size (CPS). The following table compares key features of the final VRR scheme announced on 1 March, 2019 to the discussion paper released on 5 October, 2018: Sl. No. Particulars Proposals in the Discussion Paper [5 October, 2018] 1. Eligible instruments VRR-Govt. - Any Government security including T-bills. VRR-Corp - Corporate debt instruments, including commercial papers. 2. Allocation of investment limits Through auction. 3. Investment limit for FPI No FPI (including its related FPIs) shall bid for an amount greater than 50% of the auction amount. 4. Hedging of exchange rate risk 5. Minimum retention 6. Minimum investment by FPI during the retention FPIs shall be allowed to participate in any currency or interest rate derivative instrument, OTC or exchange traded, to manage their interest rate risk or currency risk. Three years or as decided by RBI, for each auction. 67% of the CPS. Investment shall not include cash or deposits. Amounts of investment shall be in terms of the face value of securities. 7. Time limit for investment Minimum of 67% of the CPS to be invested within the one month. Final Scheme [1 March, 2019] VRR-Govt. - Any Government securities i.e., Central Government dated Securities (G-Secs), Treasury Bills (Tbills), as well as State Development Loans. VRR-Corp - Any instrument where an FPI is allowed to invest as per Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017, except units of domestic mutual funds. On tap or through auctions. An FPI (including its related FPIs) shall not be allotted an investment limit greater than 50% of the amount offered for each allotment by tap or auction, in case there is a demand for more than 100% of amount offered. FPIs shall be eligible to participate in any currency or interest rate derivative instrument, OTC or exchange traded, to manage their interest rate risk or currency risk. Authorised Dealers may offer derivative contracts 4 to eligible users under VRR (FPIs) or to its central treasury (of the group and being a group entity). Three years or as decided by RBI, for each allotment by tap or auction. 75% of the CPS. The required investment amount shall include cash holdings in the Rupee accounts used for this route. Amounts of investment shall be reckoned in terms of the face value of securities. 25% of CPS within one month and the remaining amount within three months from the date of allotment. 4 FX hedging products mentioned in A.P. (DIR Series) Circular No. 22 dated 1 March, 2019 - Forwards, options, cost reduction structures and swaps with rupee as one of the currencies for hedging. 2 pwc
Sl. No. Particulars Proposals in the Discussion Paper [5 October, 2018] 8. Retention The retention will commence from the end of the one month from the date of announcement of the auction results. 9. Continuation under VRR One month prior to the end of the committed retention, an FPI will exercise its choice to continue investments under this route by opting for an additional identical retention. 10. Exiting from VRR at the end of the retention 11. Exiting from VRR prior to end of retention 12. Consequences of violation of commitments 13. Documentation with custodians Liquidate its portfolio and exit, or shift investments to the GIL, subject to availability of limits. Selling investments to another FPI(s). An FPI(s) buying such investment shall abide by all the terms and conditions applicable to the selling FPI. Deregistration by SEBI. FPIs shall enter into separate legal agreement/ contract, enforceable within the jurisdiction of India, with their custodians, covering all the relevant aspects of the VRR. Final Scheme [1 March, 2019] Retention will commence from the date of allotment of limit. Prior to the end of the committed retention, an FPI may opt to continue investments under this route for an additional identical retention. Liquidate its portfolio and exit, or shift investments to the GIL, subject to availability of limits. Selling investments to another FPI(s). FPI(s) buying such investment shall abide by all the terms and conditions applicable to the selling FPI. Regulatory action as determined by SEBI. FPIs are permitted, with the approval of the custodian, to regularise minor violations immediately upon notice, and in any case, within five working days of the violation. Minor violations shall mean violations that are, in the considered opinion of the custodians, unintentional, temporary in nature or have occurred on account of reasons beyond the control of FPIs, and in all cases are corrected on detection. Custodians shall have in place appropriate legal documentation with FPIs that enables custodians to ensure that regulations under VRR are adhered to. Other features of the VRR scheme are as follows: The criterion for allocation of investment amount to each FPI (the CPS) shall be based on two variables the amount that the FPI proposes to invest and the retention of that investment, which shall not be less than the minimum retention applicable for that auction. FPIs should open one or more separate Special Non- Resident Rupee (SNRR) accounts for investment through VRR. All fund flows relating to investment through VRR shall be reflected in such account(s). FPIs should also open a separate security account for holding debt securities under this route. Utilisation of limits and adherence to the other requirements of this route 3 pwc
shall be the responsibility of both the FPI and its custodian. Custodians shall not permit any repatriation from the cash accounts of an FPI, if such transaction leads to the FPI s assets falling below the minimum stipulated level of 75% of CPS during the retention. FPIs investing through VRR will be eligible to participate in repos for their cash management, provided that the amount borrowed or lent under repo shall not exceed 10% of their investment under VRR. The takeaways RBI has taken a step towards attracting stable investment in debt from FPIs by keeping the VRR scheme segregated from the GIL and having a broad scope for the eligible instruments. RBI has accepted some key suggestions from industry participants, such as including cash deposits in the minimum investment requirement and providing extended timelines for investing under the VRR. Let s talk For a deeper discussion of how this issue might affect your business, please contact your local PwC advisor 3 pwc
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