To encourage more foreign investment in debt and deepen the corporate bond market, the Reserve Bank of India (RBI) will allow foreign portfolio investors (FPIs) to invest in securitised debt instruments issued by special purpose vehicles (SPVs) of financial institutions as well as in unlisted debt securities of all public companies by the end of this month, sources told FE. In consultation with the finance ministry, the RBI will amend the Foreign Exchange Management Act (FEMA) regulations to facilitate these changes in FPI investment rules, which will help them expand their investment basket. Currently, FPIs are permitted to invest only in listed debt securities. Investment in unlisted debt securities is permitted only in the case of companies in the infrastructure sector. Additionally, investment by FPIs in securitised debt instruments, such as pass-through certificates, is currently not permitted. The move assumes importance in the backdrop of net FPI debt outflow of $81 million in FY16 and $590 million up to August of FY17, from a nearly $27-billion net inflow in FY15. To reverse this trend, the Budget for FY17 proposed to allow FPIs to invest in the proposed new debt instruments. FPIs will now be allowed to invest in any certificate or instrument issued by an SPV set up for the securitisation of assets where banks, financial institutions and non-bank finance companies are originators. The move, experts reckon, could free up liquidity for financial institutions locked up in long-term contractual debts such as home loans and commercial mortgages. Typically, a bank or a housing finance company will set up a tax-exempt SPV and transfer one or a bundle of standard contractual loans from its balance sheet to the SPV. The SPV will sell the related cash flows of the loans at a discount to third-party investors as securities, which can be bonds, pass-through certificates, etc. Depending on the structure of the securitisation, investors will be repaid from the principal, and interest cash flows collected from the underlying debt and redistributed through the capital structure of the new financing. One of the most prominent developments in international finance in recent decades is securitisation. India is also moving in that direction, albeit gradually. The proposed change on FPI investment in unlisted debt securities entails that FPIs would be allowed to invest in primary issues of non-convertible debentures (NCDs)\/bonds by a public company, with a restriction that the issuing company cannot use the funds for real estate activities, purchase of land, investing in capital market, or on-lending to other entities. All sectors other than those specifically excluded could benefit from the proposal. \u201cThe proposal to permit only public companies to raise such funds may narrow the fund-raising ability to some extent, and also the need to subscribe to primary issuance by way of an investment may impact the liquidity\/investor attractiveness for such instruments,\u201d cautioned Girish Vanvari, national head of tax, KPMG in India. However, a finance ministry official clarified that there is no secondary market for unlisted debt instruments. But if investors want to sell their holdings to other investors in off-market transactions, there won\u2019t be any regulatory issue.