Sebi Proposes Regulatory Relief For Foreign Portfolio Investors Participating In Indian Government Bonds

Introduction

Foreign Portfolio Investors (FPIs) have played a significant role in shaping India’s capital market landscape. With India’s growing inclusion in global bond indices, such as the J.P. Morgan Global Emerging Market Bond Index and the Bloomberg EM Local Currency Government Index, the regulatory framework governing FPI participation in Indian Government Bonds (IGBs) has come into focus. The Securities and Exchange Board of India (SEBI), the capital market regulator, has proposed a series of regulatory relaxations for FPIs that invest exclusively in IGBs through the Voluntary Retention Route (VRR) and Fully Accessible Route (FAR). These proposals were detailed in a consultation paper released in May 2025, and public comments have been sought until June 3, 2025.

About the Consultation Paper:

The consultation paper proposes a regulatory realignment for the new class of FPIs dubbed “IGB-FPIs.” These are organizations that only invest in IGBs via the VRR and FAR channels. This class of investors is becoming more popular as their holdings under FAR surpassed INR 3 lakh crore by March 2025. In light of these factors, SEBI has put forward proposals to ease some restrictions in self-onboarding for these investors specific to their nature of investments.

FPIs are still bound to rule 8 of the SEBI (Foreign Portfolio Investors) Regulations, 2019, which requires them to register with a standard set of compliance obligations that apply uniformly to all FPIs. The consultation paper agrees with the assumption that some of these regulations are inappropriate for IGB-FPIs because of the low level of their investment activities and the limited level of risk posed by sovereign bonds.

Relaxations on KYC requirements, disclosure of eligible investor groups, investment restrictions by NRIs, disclosure timelines, and movement restrictions between regular FPIs and IGB-FPIs are also incorporated to SEBI’s proposed framework. These measures aim to maintain proper regulatory structure responsive to the risk exposure and the activities of the Investors.

Explanation:

As explained in a recent consultation paper, SEBI has recently issued a proposal to ease certain restrictions for Foreign Portfolio Investors (FPIs) who exclusively invest in Indian Government Bonds (IGBs) through Voluntary Retention Route (VRR) and the Fully Accessible Route (FAR). These IGB-focused FPIs (IGB-FPIs) are typically low-risk, long-term investors, and

SEBI recognizes that the existing compliance framework is overly complex for those investors. In this regard, SEBI has put forth several specific proposals. These proposals aim to relax oversight for a particular class of investors while not reducing the level of oversight entirely.

1. Investment Routes for Non-Residents:

Currently, non-residents can invest in Indian debt instruments via three primary channels: the General Route, the Voluntary Retention Route (VRR), and the Fully Accessible Route (FAR). Under VRR, as well as FAR, investments in government securities are not subject to the concentration or security-wise limitations that are present in other routes. These channels facilitate foreign investment with a focus on debt instruments. Over the years, the FAR, in particular, has captured increasing interest from external investors, as evidenced by the consistent annual growth in holdings.

2. KYC Periodicity Alignment

Under the existing framework, FPIs are categorized based on risk, and custodians must conduct KYC reviews every one or three years. RBI also mandates periodic KYC updates for regulated entities, with timelines ranging from two to ten years, depending on the customer’s risk profile. SEBI now proposes aligning the KYC periodicity for IGB-FPIs with RBI timelines. The intention is to reduce the burden on IGB-FPIs by eliminating the need for more frequent KYC reviews that do not reflect the underlying risk of their activities. Given that IGB-FPIs would not require trading and demat accounts or Custodial Participant (CP) codes—because their transactions would be routed through RBI’s NDS–OM platform and settled via CCIL—the need for stringent KYC updates becomes less relevant.

3. Investor Group Disclosures

SEBI regulations currently require FPIs to disclose their investor group details to help monitor compliance with limits such as 10% in equity and concentration caps in debt instruments. However, since IGB-FPIs would be investing only in IGBs through VRR and FAR, where no such limits are applicable, SEBI proposes that these investors be exempt from disclosing investor group information. This step is expected to streamline the registration process by removing non-essential data requirements.

4. Participation by NRIs, OCIs, and RIs

At present, NRIs, Overseas Citizens of India (OCIs), and Resident Individuals (RIs) are restricted from contributing more than 25% (individually) or 50% (collectively) to an FPI’s corpus. They are also prohibited from exercising control over FPIs. An exception is made for FPIs investing solely in mutual funds. SEBI proposes to extend a similar exception to IGB-

FPIs, allowing unrestricted contributions by NRIs, OCIs, and RIs and permitting them to be in control of these entities. The rationale is that since NRIs and OCIs are already allowed to invest in IGBs under the FAR route without any cap, extending this flexibility to IGB-FPIs is consistent with existing norms.

However, contributions by RIs would still need to comply with RBI’s Liberalised Remittance Scheme (LRS) and the existing rule that restricts investment to global funds with Indian exposure of less than 50%.

5. Timelines for Disclosure of Material Changes

Currently, FPIs must disclose material changes in information within seven working days for Type I changes (such as ownership or control changes) and within 30 days for Type II changes (such as address or contact information changes). SEBI proposes to allow IGB-FPIs to report both types of changes within 30 days uniformly. This proposal aims to ease compliance without undermining regulatory oversight, given the limited risk exposure of IGB-FPIs.

6. Transitioning between regular FPIs and IGB-FPIs

SEBI has proposed a new exit mechanism for regular FPIs to take over and switch to becoming IGB-FPIs, by meeting certain criteria; such as divesting themselves of all non-IGB securities, and closing their demat and trading accounts. Conversely, should an IGB-FPI choose to expand become a regular FPI, it could do so, but if transitioned into a regular FPI, they would then have to comply fully with the FPI regime in its entirety.

Conclusion:

In SEBI’s consultation paper, proposals for relaxing regulations relating to FPIs that only invest in Indian Government Bonds, through either the VRR or FAR route (i.e. IGB-FPIs) would appear to be based on the premise that these investors have necessarily less risk, thus making SEBI’s proposal to provide a reduced compliance opportunity reasonable and practical. With proposals to further streamline the compliance burden for IGB-FPIs, we anticipate seeing even more foreign interest regarding investment in Indian debt markets via inclusion into global indices.