Limits for FPI Investment in Corporate Bonds for F.Y. 2021-22 by RBI

On March 31, 2021, the Reserve Bank of India (RBI) has released an RBI/2020-21/116 A.P. (DIR Series) Circular No. 14 for the Limits for FPI Investment in Corporate bonds for F.Y. 2021-22. This circular states that the limits for Foreign Portfolio Investment in Corporate bonds will remain unchanged at 15% of the outstanding stock of securities for Financial Year 2021-22. In this blog, we will discuss the Limits for FPI Investment in Corporate bonds for F.Y. 2021-22.

Let’s Understand the Concept of FPI (Foreign Portfolio Investment)

Before we discuss about the Limits for FPI Investment in Corporate bonds for F.Y. 2021-22, let us first understand the meaning of FPI. FPI is becoming progressively more common as a means of portfolio diversification. Habitually, Foreign Portfolio Investments^[1] include securities and alternative foreign financial assets that are inertly held by a foreign investor.

Foreign Portfolio Investment is well-known among various types of investors. Most common transactors of FPI consists:

•           Companies;

•           Individuals;

•           Foreign Governments.

Advantages of FPI

1. Modification of Portfolio: FPI offers investors an easy opportunity to vary their portfolio globally. An investor would diversify their portfolio to accomplish a higher risk-adjusted return.
2. Global Credit: Investors might able to access a better credit amount in foreign nations, permitting the investor to utilize more leverage and make a better return on their equity investment.
3. Increase the liquidity: As markets become more like liquid, they become wider and deeper, and a broader range of investments can be financed. Investors can invest with the guarantee that they will be capable of achieving their portfolio or selling their financial securities rapidly if they need access to their savings.

What are the Limits for FPI Investment in Corporate bonds for F.Y. 2021-22?

• AD Category-I or Authorized Dealer Category-I banks is invited to Schedule 1 to the Foreign Exchange Management Regulations, 2019 (Debt Instruments) informed vide Notification No. FEMA.396/2019-RB dated October 17, 2019, as modified regularly and the significant directions delivered thereunder. A reference is also summoned to A.P. (DIR Series) Circular No. 30 dated April 15, 2020, on the captioned matter.
• For the Financial Year 2021-22, the Limits for FPI Investment in Corporate bonds will remain unchanged at 15 per cent of the outstanding stock of securities. Therefore, the reviewed limits for FPI investment in corporate bonds, after rounding off, will be as under the following table:

• Authorized Dealer Category-I banks might bring the matters of this circular to the Notification of their constituents and customers concerned.
• The modified limits for FPI investment in Central Government Securities and SDLs (State Development Loans for Financial Year 2021-22 will be advised individually.

• In this circular, the directions have been delivered under Sections 11 (1) and 10 (4) Exchange Management Act, 1999 (42 of 1999)and are without prejudgment to approval or consent, if any, needed under any other law.

Conclusion

In a nutshell, FPI is becoming progressively more common as a means of portfolio diversification. FPI is famous among various types of investors.

Moreover, the RBI, on March 31, 2021, has released an RBI/2020-21/116 A.P. (DIR Series) Circular No. 14 for the Limits for FPI Investment in Corporate bonds for F.Y. 2021-22. With this circular, the limits for Foreign Portfolio Investment will remain unchanged at 15 per cent of the outstanding stock of securities.

Also, Read: RBI Relaxes Norms for Investment by FPI in Defaulted Bonds

Official Circular Copy of the Limits for FPI Investment in Corporate bonds for F.Y. 2021-22 by RBI