By - Kulin Dave on May 7, 2019
In March 2019, the Reserve Bank of India (RBI) along with Government of India and the Securities and Exchange Board of India (SEBI) introduced a separate scheme called “Voluntary Retention Route” to encourage Foreign Portfolio Investors (FPI) to lock their investments in India for a considerable period. This route has been introduced in an attempt to boost foreign investment in the Indian debt market by such investors, as the market witnessed a sharp decline after the FPIs sold their debt securities worth INR 1900 Crore in February 2019.
This scheme was earlier proposed in October 2018 by the RBI through a discussion paper and, following the representations and suggestions from market participants, it released a circular that notified the FPIs regarding the Voluntary Retention Route provided to them to voluntarily invest in both government securities like treasury bills and state development funds as well as corporate debt instruments (specified in schedule 5 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India Regulations, 2017; excluding units of domestic mutual funds and dated government securities) subject to the condition that the investment must be locked in India for a minimum period of three years.
Accordingly, amendments were made to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 where a clause was added:
“(5)(a) A Foreign Portfolio Investor or a Non-Resident Indian (NRI) or an Overseas Citizen of India (OCI) may trade or invest in all exchange traded derivative contracts approved by Securities and Exchange Board of India from time to time subject to the limits prescribed by Securities and Exchange Board of India and conditions specified in Schedule 5”.
The RBI has undertaken several measures to address the liquidity concerns from the Indian debt market. Earlier, in January 2019, it revised the “External Commercial Borrowings” (ECB) norms to open the funding doors in India. Through the VRR scheme too, it shall be possible to allow funds to be invested in the defaulted assets of India, which shall help the banks to alleviate their concerns over the non-performing assets.
The RBI has also looked into some operational aspects of funding through this route to avoid any difficulty in the future. It requires the FPIs to open one or more separate special non-resident rupee (SNRR) accounts for investment through the route. All fund flows relating to investment through the route shall reflect in such account(s).