Voluntary Retention Route for Foreign Portfolio Investors: Abhishek Jha
What is VRR?
Voluntary Retention route (“VRR”)is a new mode of investment wherein the investors will not be subject to stringent macro-prudential norms and will have more flexibility in terms of instruments.
On March 2019, the Reserve Bank[1]decided to openthe VRR for Foreign Portfolio Investors (“FPI”) with the requirement to invest in long term debt funds such as corporate and government debt[2].
This scheme devised by the RBIhad intended to allure the FPIs to commit their money to Indian debt markets for minimum period of three years. To facilitate and encourage this process, more operational freedom was provided to the FPIs under the scheme vis-à-vis regular FPI investments. Till date, the scheme has witnessed a considerable amount of investment and can be safely termed as a successful move by the market regulator. The Data available on the website of Clearing Corporation of India Ltd. showed that 26,768.4006 is the allotted investments in January 2020.[3]
How different is the VRR route from regular FPI investments?
In exchange for the commitment of three years, the investments under the VRR route get considerable amount operational relaxations in the macro-prudential and other regulatory prescriptions applicable to the regular FPI investments. The investors can choose where to invest in the span of three months from the date of allocation of the funds subject to the auction outcomes. The FPIs under VRR would also have more flexibility in terms of instruments and have better group level and issue level thresholds.
What happens after the retention period under VRR is over?
The long term amount also known as called the committed portfolio size (CPS) has to be mandatorily invested up to 75% during the first three months of allotment and such investment is fixed for the minimum retention period (“retention period”), which is three years as per the latest RBI norms.
Post retention period, the FPIs are left with two choices i.e. either to head towards liquidity or shift to general investments route which is conditioned upon the availability. However, there is a third option for the FPIs to continue the investment in the VRR category by conveying the same to the custodian before the end of retention period.[4]
Where can the investment be made and how much?
Earlier this
year, the market regulator taking note of the pandemic situation,raised the
limit for investments via this route from the earlier Rs 54,606 crore to Rs 1.5
lakh crore under this scheme, according to a press release issued on May, 2020
by RBI.
The limit changes from time to time based on macro-prudential considerations
and assessment of investment demand and varies from government bonds to
corporate bonds.[5]
There are three categories of the eligible instruments under VRR:
1. VRR Government: FPIs invest in government securities such as central government securities (G-Secs), treasury bills (T-Bills) and state development loans (SDLs).
2. VRR Corporate Bond: FPIs under this category are allowed to make long term investments in all the instruments in accordance with schedule 5 of the Foreign Exchange Management (Transfer or issue of security by a person resident outside of India) Regulations, 2017.
3. VRR- Combined: Both the Government and Corporate bonds are to be eligible instruments for the investor.
With respect to corporate debt, FPIs can, under VRR, invest in instruments such as non-convertible debentures, security receipts issued by asset reconstruction companies, and securitized debt instruments. Investments under VRR will be exempt from minimum residual maturity requirements, issue limits, and category-wise concentration limits.
Conclusion
There is no doubt that advantages to higher participation by long-term FPIs in India’s debt market are huge. But the same is yet to be supported by a robust framework as the current regime is regulated by a set of direction release by RBI from time to time.
Since the FPIs are regulated both by the Securities Exchange Board of India (“SEBI”) and RBI, the directions, regulatory framework etc. fall within the purview of both these regulators. However, in the absence any comprehensive framework by SEBI on VRR for FPIs the standpoint remains unclear wr.t. the securities regulator.[6]
Another concern is the volatile market situation faced by the market in the covid-19 world, wherein the FPIs across the world are pulling out their investments Although, the RBI has created a broader runway for the FPI investments by increasing the limit to 1.5 lakh crores and a three-month additional relaxation in the time period to make investments, there still exists a doubt whether this move will bear any fruits.[7]
[1] ‘Voluntary Retention Route’ (VRR) for Foreign Portfolio Investors (FPIs) investment in debt, RBI Circulars (14th August, 2020;20:00), https://rbidocs.rbi.org.in/rdocs/Notification/PDFs/APDIR187VRR1BB1700685F042D1A4F868415C6C91F5.PDF
[2] Voluntary Retention Route for FPI investment in Indian debt – An update, PWC India (14th August, 2020; 17:00) https://www.pwc.in/assets/pdfs/newsalert/2019/pwc_news_alert_27_may_2019_voluntary_retention_route_for_fpi_investment.pdf
[3]VRR Allocation, CCI (14th August,2020 ; 14:00) https://www.ccilindia.com/AboutUs/FPI_VRR_DocLib/VRR%20Allotment.pdf
[4]The Voluntary Retention Route for Foreign Portfolio Investors: A guide to Investing in India’s Debt Market, BNP PARIBAS(August,2020;14:37)https://securities.bnpparibas.com/files/live/sites/web/files/medias/documents/VRR%20for%20FPI%20Debt%20Investment%20-%20v19_Locked%20version.pdf
[5]RBI Expands Debt Investment Limits Under ‘Voluntary Retention Route, Bloomberg Quint (August, 14th,2020; 12:33)https://www.bloombergquint.com/business/rbi-expands-debt-investment-limits-under-voluntary-retention-route
[6]Sawant Singh and Aditya Bhargava,India: Voluntary Retention Route: A Halfway Measure?, Mondaq (August 13th,2020; 15:31 https://www.mondaq.com/india/securities/863818/voluntary-retention-route-a-halfway-measure
[7]Bhavik Nair, FPIs get more time to invest under voluntary retention route, Financial Express (August 14th, 2020; 11:20 AM)https://www.financialexpress.com/market/fpis-get-more-time-to-invest-under-voluntary-retention-route/1968144/
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