Investments Rules of VRR Scheme Relaxed for 3 Months To Help Foreign Investors Manage Their Investments Better
To attract long-term and stable foreign portfolio investments (FPI) into the Indian debt markets, the Reserve Bank of India (RBI) introduced the voluntary retention route (VRR) in March 2019
. However, the current volatile market scenario amid the coronavirus (COVID-19) crisis has made the investors risk averse. As foreign investors are pulling their investments out of the Indian markets and switching over to safer havens, it is unreasonable to expect the FPIs to comply with the requirement of investing a minimum 75% of the committed portfolio size within three months from the date of the allotment of investment limits under the VRR scheme.
Investments through this route are in addition to the FPI general investment limits, provided FPIs voluntarily commit to retain a minimum of 75% of its allocated investments (called the committed portfolio size or CPS) for minimum three years (retention period). However, such 75% of CPS shall be invested within 3 months from the date of allotment of investment limits.
Recognizing the disruption posed by the COVID-19 pandemic, RBI vide circular dated May 22, 2020 (https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11896&Mode=0
), has granted additional three-months relaxation to FPIs for making the required investments. The circular further addresses the questions as to which all FPIs are covered under this relaxation and how the retention period will be determined.
This article discusses the features of the VRR scheme and the implications of RBI’s circular in brief.
What Is ‘Voluntary Retention Route’?
Key Features of the VRR Scheme:
1. The FPI is required to retain a minimum of 75% of its committed portfolio size for a minimum period of three years.
2. The allotment of the investment amount would be through tap or auctions. FPIs (including its related FPIs) shall be allotted an investment limit maximum up to 50% of the amount offered for each allotment, in case there is a demand for more than 100% of amount offered.
3. FPIs may, at their discretion, transfer their investments made under the General Investment Limit, if any, to the VRR scheme.
4. FPIs may apply for investment limits online to Clearing Corp of India Ltd (CCIL) through their respective custodians.
5. Investment under this route shall be capped at Rs1,50,000 crore (erstwhile Rs75,000 crore) or higher, which shall be allocated among the following types of securities, as may be decided by the RBI from time to time.
a. ‘VRR-Corp’: voluntary retention route for FPI investment in corporate debt instruments.
b. ‘VRR-Govt’: voluntary retention route for FPI investment in government securities.
c. ‘VRR-Combined’: voluntary retention route for FPI investment in instruments eligible under both VRR-Govt and VRR-Corp.
Relaxation from (a) minimum residual maturity requirement, (b) Concentration limit, (c) Single/Group investor-wise limits in corporate bonds as stipulated in RBI Circular dated 15 June 2018
where exposure limit of not more than 20% of corporate bond portfolio to a single corporate (including entities related to the corporate) have been dispensed with.
However, limit on investments by any FPI, including investments by related FPIs, shall not exceed 50% of any issue of a corporate bond except for investments by multilateral financial institutions and investments by FPIs in exempted securities.
7. 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 VRR shall reflect in such account(s).
What are the eligible instruments for investments?
1. Any government securities i.e., Central government dated securities (G-Secs), treasury bills (T-bills) as well as state development loans (SDLs);
2. Any instrument listed under schedule 1 to Foreign Exchange Management (Debt Instruments) Regulations, 2019 other than those specified at 1A(a) and 1A(d) of that schedule; However, pursuant to the recent amendments, investments in Exchange Traded Funds investing only in debt instruments is permitted.
3. Repo transactions, and reverse repo transactions.
What are the options available to FPIs on the expiry of retention period?
Any FPI wishing to exit its investments, fully or partly, prior to the end of the retention period may do so by selling their investments to another FPI or FPIs.
3-months investment deadline extended in view of COVID-19 disruption
As discussed above, once the allotment of the investment limit has been made, the successful allottees shall invest at least 75% of their CPS within three months from the date of allotment. While announcing various measures to ease the financial stress caused by the COVID-19 pandemic, the RBI governor acknowledged the fact that VRR scheme has evinced strong investor participation, with investments exceeding 90% of the limits allotted under the scheme.
Considering the difficulties in investing 75% of allotted limits, it has been decided that an additional three months will be allowed to FPIs to fulfill this requirement.
Which all FPIs shall be considered eligible to claim the relaxation?
FPIs that have been allotted investment limits, between 24 January 2020 (the date of reopening of allotment of investment limits) and 30 April 2020 are eligible to claim the relaxation of additional three months.
When does the retention period commence? What will be the implication of extension on retention period?
The retention period of three years commence from the date of allotment of investment limit and not from date of investments by FPIs. However, post above relaxation granted, the retention period shall be determined as follows:
*Unqualified FPIs - whose investments limits are not allotted b/w 24.01.2020 and 30.04.2020
**Qualified FPIs to relaxation - whose investments limits not allotted b/w 24.01.2020 and 30.04.2020
What will be the consequences if the required investments not made within extended period of three months?
Since no separate penal provisions are prescribed under the circular, in terms of VRR Scheme, 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 5 working days of the violation.
Custodians shall report all non-minor violations as well as minor violations that have not been regularised to SEBI
The COVID-19 disruption has adversely impacted the Indian markets where investors are dealing with the market volatility. Given this, FPIs are pulling out their investments from the Indian markets (both equity and debt). Thus, relaxing investments rules of VRR Scheme during such financial distress, will help the foreign investors manage their investments appropriately.