Foreign portfolio investors still waiting for easier entry

To deepen the Indian corporate bond market and broaden the sources of funding available to Indian borrowers, the 2016-17 budget announced that foreign portfolio investors (FPIs) would be allowed to invest in unlisted debt securities and securities issued by securitization special purpose vehicles. Although it was expected that the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) would soon issue directions to implement this measure, progress on this has been limited. While the RBI regulates the entry of foreign exchange in India, SEBI regulates the licensing and functioning of FPIs (including the nature of investments an FPI is permitted to make in India).

The RBI placed on its website for public comments in May 2016 a draft circular on investment by FPIs in unlisted debt securities and securitization instruments. The draft circular permitted FPIs to invest only in debt securities issued by “public companies”, and restricted the use of proceeds for real estate activities, purchase of land, capital market investment or on-lending to other entities. Compliance with these conditions would have to be ensured by custodian banks of FPIs on the basis of an undertaking from the issuer.

The draft circular also permitted FPIs to invest in any certificate or instrument issued by a special purpose vehicle established for securitization of assets originated by banks or non-banking financial companies, and any certificate or instrument issued and listed in terms of SEBI’s regulations.