Proposed Voluntary Retention Route

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With an aim to attract long-term and stable FPI investments into debts market while providing FPIs operational flexibility to manage the investments, SEBI has proposed the Voluntary Retention Route (“VRR”) to enable their investment in debts markets in India. This is also seen as a move to open avenues for stressed companies in need of fresh debt investment and to thwart the regressive fleeing of FPIs from the Indian Markets.

Per the Discussion Paper published by the Reserve Bank of India dated October 05, 2018, it is proposed that FPIs be permitted to invest in Government Securities (including Treasury Bills) and also in Corporate Debt Instruments (including Commercial Papers) subject to the retention of their investment in India for a minimum period of three years (or a period of their choice in agreement with the RBI) and minimum investment of 67% of Committed Portfolio Size.

Per the proposal, investment through this route will be in addition to the FPI General Investment Limits prescribed by SEBI. The total amount for investment through this route would be separately indicated by the regulators for Government debt and corporate debt through an auction process. The criterion for allocation (Committed Portfolio Size, or CPS) would be as per the retention proposed by the FPI in the bid. Reinvestment of the income generated through this route is left to the FPIs discretion.

In addition, FPIs would be permitted participation in currency and interest rate derivative instruments, OTC or exchange-traded, to hedge their interest rate or currency risk. Through this route, FPIs would also be eligible to participate in Repos for liquidity management subject that their borrowing does not exceed 10% of their investment under VRR and subject also that selling of securities under repo does not bring the holdings below 67% of the CPS. In this regard, FPIs will have the flexibility of modulating investments between 67%- 100% as per their strategy and philosophy.

What FPIs would need to do?

  • Enter into separate legal agreements and contracts covering these aspects of VRR.
  • Open a Separate Special Non-Resident Rupee Account for VRR investments.
  • Open a separate Securities account for holding debt securities under VRR.

Reserve Bank of India has cited the London Inter-Bank Offer Rate (“LIBOR”) fixing and pressed on the principles of financial benchmarks by the International Organization of Securities Commissions (“IOSCO”).

Emphasizing the reliability of financial benchmarks in the pricing and valuation of financial instruments, it was declared that the RBI plans to come out with draft regulations surrounding financial benchmarks by the end of October 2018.

Manal Shah

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