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RBI/2018-19/135
A.P. (DIR Series) Circular No. 21
March 01, 2019
To
All Authorized Persons
Madam / Sir
‘Voluntary Retention Route’ (VRR) for Foreign Portfolio Investors (FPIs)
investment in debt
Attention of Authorised Dealer Category-I (AD Category-I) banks is invited to
the following regulations, as amended from time to time, and the relevant
directions issued under these regulations.
a. Foreign Exchange Management
(Permissible Capital Accounts Transactions) Regulations, 2000 notified vide
Notification No. FEMA 1/2000-RB dated May 03, 2000;
b. Foreign Exchange
Management (Borrowing and Lending) Regulations, 2018 notified vide Notification
No. FEMA 3(R)/2018-RB dated December 17, 2018;
c. Foreign Exchange Management
(Transfer or Issue of Security by a Person Resident outside India) Regulations,
2017 notified vide Notification No. FEMA.20(R)/2017-RB dated November 07, 2017;
and
d. Foreign Exchange Management (Foreign Exchange Derivative Contracts)
Regulations, 2000 notified vide Notification No. FEMA 25/RB – 2000 dated May 03,
2000.
2. A reference is also invited to the discussion paper on
‘Voluntary Retention Route’ (VRR) for investments by Foreign Portfolio Investors
(FPIs) released by the Reserve Bank on October 05, 2018. The VRR scheme has been
finalized after taking into consideration the comments and views received, and
attached as Annex
3. Suitable amendments have been made to regulations
under the Foreign Exchange Management Act, 1999 (Act 42 of 1999) to enable FPIs
participating in the VRR scheme to hedge their interest rate and exchange rate
risks related to their investments under the scheme and to undertake
repo/reverse repo transactions to meet their liquidity requirements. A copy of
the following amendments notified in the Official Gazette is enclosed.
a)
Notification No. FEMA 390/2019-RB dated February 26, 2019 (GSR. No 161 (E) dated
February 27, 2019);
b) Notification No. FEMA 391/2019-RB dated February 26,
2019 (GSR. No 162 (E) dated February 27, 2019);
c) Notification No. FEMA 3
(R)1/2019-RB dated February 26, 2019 (GSR. No 163 (E) dated February 27, 2019);
and
d) Notification No. FEMA 20 (R)5/2019-RB dated February 26, 2019 (GSR. No
164 (E) dated February 27, 2019)
4. A reference is also invited to A.P.
(DIR Series) Circular No. 22 dated March 01, 2019 on hedging of exchange rate
risk by Foreign Portfolio Investors under Voluntary Retention Route, issued
today (March 01, 2019).
5. These directions shall be applicable with
immediate effect.
6. The directions contained in this circular have been
issued under sections 10(4) and 11(1) of the Foreign Exchange Management Act,
1999 (42 of 1999) and are without prejudice to permissions/ approvals, if any,
required under any other law.
Yours faithfully
(T. Rabi Sankar)
Chief General Manager
Annex
‘Voluntary Retention Route’ (VRR) for Foreign Portfolio Investors (FPIs)
investment
Introduction
The Reserve Bank, in consultation with the Government of India
and Securities and Exchange Board of India (SEBI), introduces a separate
channel, called the ‘Voluntary Retention Route’ (VRR), to enable FPIs to invest
in debt markets in India. Broadly, investments through the Route will be free of
the macro-prudential and other regulatory norms 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. Participation through
this Route will be entirely voluntary. The features of the Route are explained
below in detail.
2. Definitions
i. ‘Committed Portfolio Size’ (CPS),
for an FPI, shall mean the amount allotted to that FPI.
ii. ‘General
Investment Limit’, for any one of the three categories, viz., Central Government
Securities, State Development Loans or Corporate Debt Instruments, shall mean
FPI investment limits announced for these categories under the Medium Term
Framework, in terms of A.P. (DIR Series) Circular No. 22 dated April 6, 2018, as
modified from time to time.
iii. ‘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.
iv. ‘Related FPIs’ shall mean
‘investor group’ as defined in Regulation 23(3) of SEBI (Foreign Portfolio
Investors) Regulations, 2014.
v. ‘Repo’ shall have the same meaning as
defined in Section 45U (c) of RBI Act, 1934; and for the purpose of this
regulation excludes repo conducted under the Liquidity Adjustment Facility and
the Marginal Standing Facility.
vi. ‘Retention Period’ shall mean the time
period that an FPI voluntarily commits for retaining the CPS in India.
vii.
‘Reverse Repo’ shall have the same meaning as defined in Section 45U (d) of RBI
Act, 1934; and for the purpose of this regulation excludes reverse repo
conducted under the Liquidity Adjustment Facility and the Marginal Standing
Facility.
viii. ‘VRR-Corp’ shall mean Voluntary Retention Route for FPI
investment in Corporate Debt Instruments.
ix. ‘VRR-Govt’ shall mean Voluntary
Retention Route for FPI investment in Government Securities.
3. Eligible
investors
Any FPI registered with SEBI is eligible to participate through
this Route. Participation through this Route shall be voluntary.
4.
Eligible instruments
a. Under VRR-Govt, FPIs will be eligible to invest in
any Government Securities i.e., Central Government dated Securities (G-Secs),
Treasury Bills (T-bills) as well as State Development Loans (SDLs). Under
VRR-Corp, FPIs may invest in any instrument listed under Schedule 5 of Foreign
Exchange Management (Transfer or Issue of Security by a Person Resident outside
India) Regulations, 2017 notified vide Notification No. FEMA.20(R)/2017-RB dated
November 07, 2017, other than those specified at 1A(a) and 1A(d) of that
Schedule.
b. Repo transactions, and reverse repo transactions.
5.
Features
a. Investment through this Route shall be in addition to the General
Investment Limit. Investment under this route shall be capped at Rs.40,000 crore
for VRR-Govt and Rs.35,000 crore for VRR- Corp per annum, or such higher amount,
as may be decided by the Reserve Bank from time to time. The investment limit
shall be released in one or more tranches.
b. Allocation of investment amount
to FPIs under this Route shall be made on tap or through auctions. Details of
the auction mechanism are given in Appendix.
c. The mode of allotment,
allocation to VRR-Govt and VRR-Corp categories and the minimum retention period
shall be announced by the Reserve Bank ahead of allotment.
d. No FPI
(including its related FPIs) shall 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.
e. The minimum retention
period shall be three years, or as decided by RBI for each allotment by tap or
auction.
f. FPIs shall invest the amount allocated, called the Committed
Portfolio Size (CPS) in the relevant debt instruments and remain invested at all
times during the voluntary retention period, subject to the following
relaxations:
i. The minimum investment of an FPI during the retention period
shall be 75% of the CPS (The flexibility for modulating investments between
75%-100% of CPS is intended to enable FPIs to adjust their portfolio size as per
their investment philosophy).
ii. The required investment amount shall be
adhered to on an end-of-day basis. For this purpose, investment shall include
cash holdings in the Rupee accounts used for this Route.
g. Amounts of
investment shall be reckoned in terms of the face value of securities
6.
Management of portfolio
a. Successful allottees are required to invest 25% of
their CPS within one month and the remaining amount within three months from the
date of allotment. The retention period will commence from the date of allotment
of limit.
b. Prior to the end of the committed retention period, an FPI, if
it so desires, may opt to continue investments under this Route for an
additional identical retention period. In that case, it shall convey this
decision to its custodian.
c. In case an FPI decides not to continue under
VRR at the end of the retention period, FPI may liquidate its portfolio and
exit, or it may shift its investments to the ‘General Investment Limit’. This
shifting would be subject to availability of limit under the ‘General Investment
Limit’.
d. FPIs that wish to liquidate their investments under the Route
prior to the end of the retention period may do so by selling their investments
to another FPI or FPIs. However, the FPI (or FPIs) buying such investment shall
abide by all the terms and conditions applicable to the selling FPI under the
Route.
e. Any violation by FPIs shall be subjected to regulatory action as
determined by SEBI. FPIs are permitted, with the approval of the custodian, to
regularize minor violations immediately upon notice, and in any case, within
five working days of the violation. Custodians shall report all non-minor
violations as well as minor violations that have not been regularised to SEBI.
7. Other relaxations
a. Investments made through the Route shall not be
subject to any minimum residual maturity requirement, concentration limit or
single/group investor-wise limits applicable to corporate bonds as specified in
paragraphs 4(b), (e) and (f) respectively of A.P. (DIR Series) Circular No. 31
dated June 15, 2018.
b. Income from investments through the Route may be
reinvested at the discretion of the FPI. Such investments will be permitted even
in excess of the CPS.
8. Access to other facilities
a. FPIs investing
through the Route 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.
b. FPIs investing under this route
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.
9. Other operational aspects
a. Utilisation of limits
and adherence to other requirements of this Route shall be the responsibility of
both the FPI and its custodian.
b. 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 period.
c. Custodians shall have in place appropriate legal
documentation with FPIs that enables them (custodians) to ensure that
regulations under VRR are adhered to.
d. FPIs shall open one or more separate
Special Non-Resident Rupee (SNRR) account for investment through the Route. All
fund flows relating to investment through the Route shall reflect in such
account(s).
e. FPIs shall also open a separate security account for holding
debt securities under this Route.
Appendix
Auction process for allocation of investment amount under VRR
The auction process for allotment of investment amounts under VRR shall be as
under:
a. An FPI shall bid two variables - the amount it proposes to invest
and the retention period of that investment, which shall not be less than the
minimum retention period applicable for that auction.
b. FPIs are permitted
to place multiple bids.
c. The criterion for allocation under each auction
shall be the retention period bid in the auction.
d. Bids will be accepted in
descending order of retention period, the highest first, until the amounts of
accepted bids add up to the auction amount.
e. Allotment at margin (i.e., at
the lowest retention period accepted), in case the amount bid at margin is more
than the amount available for allotment, shall be as below:
i. The
marginal bid shall be allocated partially such that the total acceptance amount
matches the auction amount.
ii. In case there are more than one marginal
bids, allocation shall be made to the bid with the largest amount, and then in
descending order of amount bid until the acceptance amount matches the auction
amount.
iii. In case the amount offered is the same for two or more marginal
bids, the amount will be allocated equally.
f. If an FPI has been
allotted multiple bids in an auction, the CPS shall be reckoned for each bid
separately.
g. FPI which has got CPS allocated under an auction will be
eligible to participate in subsequent auction as well.
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