RBI Relaxes Norms for Investment by FPI in Defaulted Bonds

RBI Relaxes Norms for Investment by FPI in Defaulted Bonds
Shivani Jain
| Updated: Mar 09, 2021 | Category: News, RBI Advisory

The Reserve Bank of India or RBI, by way of Notification No RBI/ 2020 – 21/ 105 A.P (DIR Series) Circular No 12, issued on 26.02.2021, has relaxed the norms concerning Investment by FPI in Defaulted Bonds. Further, the acronym FPI stands for Foreign Portfolio Investors.

Also, the said relaxations are issued under the provisions of sections 10 (4) and 11 (1) of the Foreign Exchange Management Act 1999 and are without any prejudice to permissions/ approvals, if in case any, necessary under any other law.

In this learning blog, we will cover in detail the concept of Foreign Portfolio Investor, together with the relaxations offered in the Investment by FPI in defaulted bonds.

Concept of Foreign Portfolio Investor

The term FPI or Foreign Portfolio Investor means a person who fulfils the eligibility criteria as specified by Rule 4 of the FPI Regulations and has been duly registered under the provisions of Chapter II.

Further, FII (Foreign Institutional Investor) and QFI (Qualified Foreign Investors) holding a valid registration certificate for the period of three years for which charged fees have been paid are considered as FPI.

In layman words, a Foreign Portfolio Investor is a foreign investor who invests in Indian shares and securities for not more than 10% of the total securities. Also, the same satisfies the criteria prescribed by the regulations as well.

Further, it shall be noted that FPI permits the investors to buy stocks or other financial assets from the Indian securities market. However, FPI does not provide the investor with a direct ownership of financial assets.

Also, it shall be taken into notice that FPI is bifurcated into three categories based on the risk profile, which are as follows:

  • Category I or Low Risk;
  • Category II or Moderate Risk;
  • Category III or High Risk

Also, Read: Money Changer License from RBI: Complete Guide on AMC License

Reasons for Relaxing Norms for Investment by FPI in Defaulted Bonds

In order to further increase and boost FPIs (Foreign Portfolio Investments) in the corporate bond segment, the Reserve Bank of India (RBI) has decided to exempt FPI investment in the defaulted corporate bonds from the short term limit and the minimum residual maturity condition under the MTF (Medium Term Framework).

Regulations and Notification considered for Relaxing Norms

The different regulations and notifications considered for relaxing investment norms for Foreign Portfolio Investors are as follows:

  • Foreign Exchange Management (Debt Instruments) Regulations 2019, notified through FEMA 396/ 2019 – RB, dated 17.10.2019;
  •  A.P (DIR Series) Circular No 31, dated 26.11.2015;
  • A.P (DIR Series) Circular No 31, dated 15.06.2018;
  • Statement on Developmental & Regulatory Policies, dated 05.02.2021;

Conclusion

In a nutshell, FPIs or Foreign Portfolio Investors are eligible to invest in the debt instruments and security receipts issued by AMCs (Asset Management Companies). Also, they are eligible to invest in the debt instruments offered by an entity under CIRP (Corporate Insolvency Resolution Process), based on the resolution plan approved by the NCLT (National Company Law Tribunal) under the provisions of Insolvency and Bankruptcy Code 2016.

Moreover, these investments are exempt from the short term and minimum residual maturity condition under MTF (Medium Term Framework).

Official Notification passed by the Reserve Bank of India

Official-Notification-passed-by-the-Reserve-Bank-of-India

Also, Read: Importance of NBFCs: A Priority Sector for the RBI

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Shivani Jain

Shivani has completed her B com LLB (Hons) and has the experience of writing various research papers during her college time. Earlier she was working as an Associate in a Delhi based Law Firm, but her interest in writing made her pursue Legal Content Writing as a career. Her core area of interest is in writing about various legal enactments, tax, and finance.

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