The Reserve Bank of India (‘RBI’) recently issued a notification dated June 15, 2018, in supersession of the RBI notifications dated April 27, 2018 and May 1, 2018, for providing some operational flexibility as well as transition path for investments by Foreign Portfolio Investors (‘FPIs’) in debt (‘Notification’). Below is a summary of the key changes brought about by this notification:

i. Reduced minimum residual maturity for corporate bonds:  The minimum residual maturity requirement for investments by FPIs in corporate bonds has reduced from three years to one year (subject to the condition that short-term investments[1] in corporate bonds by a FPI, calculated on an end-of-day basis, must not exceed 20% of the total investment of that FPI in corporate bonds). Investments: (a) made in security receipts issued by asset reconstruction companies (‘SRs’); or (b) made on or before April 27, 2018, must not be included to calculate such limit.

ii. Single/ Group investor wise concentration limits: This notification imposes the following investor and group wise limits for investments in corporate bonds:

· Per ‘issue’ limit: FPIs can invest in any issue of corporate bonds subject to a cap of 50% of such issue. If such limit is already breached by investments made by an FPI and/or its investor group, such FPIs may not make further investments in such issue until such limit is met. This requirement is not applicable in respect of investments by FPIs in SRs.

· Per ‘corporate’ limit: As on April 27, 2018, FPIs cannot have an exposure of more than 20% of its entire corporate bond portfolio to a single corporate (this includes exposures to related entities of the corporate). If the exposure exceeds 20%, the FPI cannot make further investments in that corporate / group until the above concentration limit is met. Investments in new corporate bonds made by the FPI after April 27, 2018 (in corporates other than those referred to in para a) above) will have to meet the 20% corporate limit from April 1, 2019 onwards. FPIs registering after April 27, 2018 are permitted to comply with this requirement by: (a) March 31, 2019; or (b) six months from the date of registration, whichever is later. The restrictions mentioned above in respect of corporate bonds are not applicable to investments by multilateral financial institutions and to investments by FPIs in SRs.

iii. Relaxation of norms for pipeline investments: Investment transactions by FPIs in corporate bonds that were under process but had not materialised as on April 27, 2018 (pipeline investments), will be exempt from the ‘per issue’ limit and ‘per corporate’ limits described above, subject to the custodian of the FPI reasonably satisfying itself that: (a) the major parameters such as price/rate, tenor and amount of the investment have been agreed upon between the FPI and the issuer on or before April 27, 2018; (b) the actual investment will commence by December 31, 2018; and (c) the investment is in conformity with the extant regulations governing FPI investments in corporate bonds prior to April 27, 2018.

iv. Concentration limits per category of FPI: The following limits for the relevant category, inter alia, have been prescribed by this notification for investments by FPIs in Central Government securities (‘G-secs’), State Department Loans (‘SDLs’) and corporate debt securities: (i) 15% of the prevailing limit; and (ii) 10% of the prevailing limit.

v. Minimum residual maturity for G-secs: The Notification permits FPIs to invest in G-secs (including in treasury bills and SDLs) without any minimum residual maturity requirement, provided that investments by a FPI in securities with residual maturity less than one year, will not exceed 20% of the total investment of that FPI in that category.

vi. The cap on aggregate FPI investments in Central G-secs has been increased from 20% to 30% of the outstanding stock of that security.

vii. FPIs have been prohibited from investing in partly paid instruments.

[1] Investments with residual maturity up to one year.