Foreign investors in debt to get new mechanism, RBI proposes Voluntary Retention Route

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Mumbai | Updated: October 6, 2018 3:48:54 AM

Under the proposed Route, FPIs will have more operational flexibility in terms of instrument choices as well as exemptions from regulatory provisions such as the cap on short-term investments at 20% of portfolio size, concentration limits, and caps on exposure to a corporate group, RBI said

RBI mentioned in the press release that the objective of the VRR channel is to attract long-term and stable FPI investments into debt markets while providing FPIs with operational flexibility to manage their investments.

The Reserve Bank of India (RBI) on Friday, in consultation with the government of India and the Securities and Exchange Board of India (Sebi), proposed to introduce a separate channel, called the ‘Voluntary Retention Route’ (VRR), to enable Foreign Portfolio Investments (FPIs) to invest in debt markets in India.

Broadly, investments through the route will be free of the macro-prudential and other regulatory prescriptions applicable to FPI investments in debt markets, provided FPIs voluntarily commit to retain a required minimum percentage of their investments in India for a period of their choice.

“To encourage FPIs willing to undertake long-term investments, a special route called VRR is being proposed. Under the proposed route, FPIs will have more operational flexibility in terms of instrument choices as well as exemptions from regulatory provisions such as the cap on short-term investments (less than one year) at 20% of portfolio size, concentration limits, and caps on exposure to a corporate group (20% of portfolio size and 50% of a single issue),” the central bank said.

RBI mentioned in the press release that the objective of the VRR channel is to attract long-term and stable FPI investments into debt markets while providing FPIs with operational flexibility to manage their investments. Any entity registered as an FPI with SEBI is eligible to participate through this Route.
Rajnish Kumar, chairman, SBI, said, “The proposed Voluntary Retention Route (VRR) for FPI participation in corporate bonds markets on a long-term basis is a welcome move and will add depth to the market in terms of broad based participation.” FPIs investing through the route will be eligible to participate in repos for liquidity management, provided that the amount borrowed or lent under repo shall not exceed 10% of their investment under VRR. Securities sold under repo shall not bring the holdings below 67% of the commited portfolio size (CPS). Securities bought under repos shall not be reckoned for maintenance of the minimum 67% of CPS.

To be eligible to invest under this route, it said, FPIs will need to voluntarily commit to retain in India a minimum required percentage of their investments for a period of their choice. FPIs would apply for investment limits under the route through an auction process, it said.

Noting that the robustness and reliability of financial benchmarks are critical for efficient pricing and valuation of financial instruments, the RBI said ensuring the credibility of benchmarks promotes their wider adoption, which in turn facilitates efficient transmission of price signals in the financial system.

(With inputs from PTI)

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