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New Norms for FPI Investments in Corporate Bonds and G-Secs

Finsec Law Advisors

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In the Sixth Bi-monthly Monetary Policy Statement, 2014-15, released on February 3, 2015, by the RBI in consultation with the Government, the RBI communicated its decision to incentivise long term foreign investors. Pursuant to this, SEBI has issued two circulars dated February 3 and February 5, 2015, making suitable changes to the norms governing investments by FPIs in corporate bonds and G-Secs.

Currently, FPIs are permitted to invest in G-Secs with a minimum residual maturity of three years. However, there is no such condition for investments in corporate bonds by FPIs. The February 3, 2015, circular harmonises the residual maturity requirement between corporate bonds and G-Secs. The circular requires that all future investments by FPIs, within the overall corporate debt limit (USD 51 billion), including the limits vacated when the current investment by an FPI runs off either through sale or redemption, shall be required to be made only in corporate bonds with a minimum residual maturity of three years. However, there is no lock-in restriction for such investments and FPIs would be free to sell such securities (including those that are presently held with less than three years residual maturity) to domestic investors. Furthermore, FPIs will not be allowed to invest in liquid and money market mutual fund schemes which have a short maturity period.

As regards G-Secs, FPI investments are currently capped at USD 30 billion, of which USD 5 billion is reserved for long term investors. Keeping in mind that the said limit is now fully utilised, it was decided to permit the reinvestment of coupons received from existing G-Secs into further G-Secs, even when the existing limits are fully utilised. FPIs will have an investment period of five working days from the date of receipt of the coupon and coupons invested in purchasing G-Secs would be classified into a separate investment category, which would be over and above the existing government debt limit of USD 30 billion. This reinvestment facility would also be available on any further coupons that may be generated by such reinvestment of coupons.