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
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.
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.