The Master Direction 2025: A Guide To Non-Resident Investment In Indian Debt Instruments

Introduction:

The Reserve Bank of India has issued this Master Direction-Non-resident Investment in Debt Instruments Directions, 2025 (“Direction”), to regulate and streamline non-resident investments into debt instruments in India. This directive combines various previous rules and lays down the road-map for the said investments, specifically for Foreign Portfolio Investors and other eligible non-residents. It spells out the routes of the investments, defines important terminologies, and gives out what compliance measures are to be adhered to so that such investments do not deviate from the economic and financial stability objectives of India.

Explanation:

https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12765&Mode=0

The circular has seven parts, of which the first part deals with applicability and definitions of key terms relating to non-resident investments in debt instruments. It clarifies that the Directions are to apply to all transactions by eligible non-residents in debt instruments, with immediate effect. Important concepts defined include Corporate Debt Securities, Foreign Portfolio Investor, Government Securities, and Voluntary Retention Route. In addition, it introduces investment modes such as the General Route, Voluntary Retention Route, Fully Accessible Route, and the Sovereign Green Bond Scheme for non-resident investors.

Part 2 of the Master Directions gives detailed regulations for Foreign Portfolio Investors (“FPI”) investing in Government and Corporate Debt Securities under the General Route. Limits on Investments are:

•Central Government securities: 6% of the outstanding stock,

•State Government securities: 2% of the outstanding stock,

•Corporate debt securities: 15% of outstanding stock.

Investment Rules:

Government Securities: FPIs can invest without a minimum maturity limit. Short-term investments (up to 1year) are restricted to 30% of the total FPI investment in each category. Investments in a particular security by an individual FPI cannot exceed 30% of that security’s outstanding stock. Reinvestment of coupon proceeds and sales/redemptions is to stay within limits.

Corporate Debt Securities: FPIs must invest in securities whose maturity is more than one year, with investments in short-term securities limited to 30%. No single FPI may account for more than 50% of the total value of securities offered by any given corporate issuer or entity. There are concentration limits that prohibit a single FPI from investing more than 10-15% of the total value of the securities of any issuer. Some specific exemptions also exist, namely with respect to securities under corporate insolvency or securitized assets.

FPI investments in both categories are monitored by the Clearing Corporation of India Ltd. (“CCIL”) and depositories, with compliance limits set for which the FPI is responsible.

Part 3 discusses the Voluntary Retention Route (“VRR”) for foreign portfolio investors investing in Indian debt instruments. The Voluntary Retention Route allows foreign portfolio investors to invest in eligible debt instruments, subject to specific conditions. Eligible instruments exclude mutual funds or exchange-traded funds investing predominantly in equity, and restrict certain other investments such as partly paid debt instruments.

Investments on the VRR amount will not exceed ₹250,000 crore or higher and will be provided on a “first-come, first-served” or auction basis. FPIs may invest in unlisted securities, provided there are restrictions imposed on real estate, land acquisition, and capital market nativity. The prescribed minimum retention period for any investment is set at three years from the date of allotment. During this period, FPI must maintain, on an end-of-day basis, a minimum of 75% of the committed portfolio size (“CPS”) of their investments.

FPIs may transfer their investments that were made under the General Route to the Voluntary Retention Route, as well as reinvest income accrued from VRR investments. The investments made under the VRR are not subject to any minimum residual maturity or concentration limits. Upon the completion of the retention period, FPIs may exit through liquidation, move back to the General Route, or extend the retention period. Before the end of the retention period, FPIs may exit if they find another FPI to purchase their investments. For making investments under the VRR, FPIs must open Special Non-Resident Rupee (“SNRR”) accounts, and compliance with the VRR regulations rests with the custodians.

Part 4 requires the Central Government strategies for government securities whereby FPIs, NRIs, and OCIs are allowed to invest in certain securities without any investment limits or macro-prudential controls. Eligible instruments include securities issued by the Central Government but that which may be added in the future as notified by the Reserve Bank.

Part 5 deals with the issue of Sovereign Green Bonds by the Indian Government available to eligible investors in terms of the ‘Scheme for Trading and Settlement of Sovereign Green Bonds in the International Financial Services Centre in India’, notified by the Reserve Bank, vide the Scheme for Trading and Settlement of Sovereign Green Bonds in the International Financial Services Centre in India dated 29 August, 2024, as amended from time to time.

Part 6 presents the facilities for non-residents for dealing in transactions in foreign exchange, interest rate, and credit derivatives generating specific guidelines from the RBI. FPIs are advocating to operate in both primary and secondary Government securities markets and can buy and sell at will through members of NDS-OM and NDS-OM Web module. FPIs have to pay margins, and the foreign exchange banks facilitate the margining. It is mandatory to report OTC trades in Government securities within three hours, others other than NDS-OM web module trades. Deliveries can be done on a T+1 or T+2 basis, while investment amounts in terms of securities shall be evaluated at their face value.

Part 7 describes obligations for non-residents, custodians, and entities related to investment in debt instruments by the Reserve Bank in order to provide provisions for information or clarifications. The RBI or other authorized agents may also disclose anonymized transaction data. It discusses violations of either investment limits or macro-prudential controls, which should be reversed. Any FPI violating the guidelines may be subjected to enforcement action by SEBI, with minor violations allowed to be regularized within five days. Custodians should notify SEBI of violations. Therefore, investments would be subject to the FEMA provisions, 1999, and the relevant RBI regulations.

Conclusion:

The “Master Direction – Non-resident Investment in Debt Instruments Directions, 2025” provides a structured and transparent framework for non-resident investments in India’s debt market, ensuring regulatory clarity and financial stability. By outlining distinct investment routes, limits, and guidelines for Foreign Portfolio Investors (FPIs), it fosters a controlled yet open investment environment. The direction’s provisions on compliance, monitoring, and penalties ensure adherence to regulations, promoting responsible foreign investments while supporting India’s economic growth and financial markets.