SEBI Amendments relating to FPI Investments
The recent SEBI amendments permit registered Foreign Portfolio Investors (FPIs) to invest in unlisted corporate debt securities and securitised debt instruments.
Further to the announcement in the Union Budget 2016-2017, the Securities and Exchange Board of India (SEBI) has expanded the list of instruments in which FPIs can invest under the corporate bond route to include (i) unlisted corporate debt securities issued by Indian corporates; and (ii) securitised debt instruments.
The amendments introduced by SEBI on 27 February 2017 to the SEBI (Foreign Portfolio Investors) Regulations, 2014 (FPI Regulations) will come into effect as and when the government issues appropriate notifications in the Official Gazette.
2. KEY CHANGES INTRODUCED
(a) Changes to the FPI Regulations
(i) Investment in Unlisted Non-Convertible Debentures (NCDs) by FPIs
Previously, FPIs could only subscribe to or acquire (a) NCDs issued by an Indian company on a primary basis if the NCDs were listed on a stock exchange, within 15 days of investment; or (b) unlisted NCDs issued by Indian companies in the infrastructure sector.
SEBI has now amended the FPI Regulations permitting FPIs to invest in unlisted NCDs/bonds issued by an Indian company, subject to the provisions of the Company Act, 2013 and the rules framed thereunder.
(ii) Investment in Securitised Debt Instruments by FPIs
FPI Regulations have been amended permitting FPIs to invest in securitised debt instruments including (i) any certificate or instrument issued by a special purpose vehicle (SPV) set up for securitisation of assets with banks, FIs or NBFCs as originators; and/or (ii) any certificate or instrument issued and listed in terms of the SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008.
(iii) Amendment to the Definition of 'Offshore Derivative Instrument'
SEBI has amended the definition of offshore derivative instrument to include unlisted debt securities and securitised debt instruments. These instruments can now be held by FPIs against which they can issue an instrument overseas.
Similar amendments had been made and notified by the Reserve Bank of India (RBI) to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (FEMA 20), which became effective from 24 October 2016.
(b) RBI Circular to Authorised Dealer Banks (A.D Banks)
RBI, vide its circular dated 17 November 2016, has informed A.D Banks of the expanded list of instruments that FPIs can invest in. However, the circular specifies that investments in unlisted NCDs/bonds by FPIs will be subject to a minimum residual maturity of 3 years and imposes end- use restrictions on investment in real estate business, capital markets and purchase of land.
Prior to the amendments to FEMA 20 and the FPI Regulations, Indian companies (except those in the infrastructure sector) could issue only listed NCDs/bonds for attracting FPI participation, resulting in a shallow corporate debt market.
The amendments to FEMA 20 and the FPI Regulations are a welcome move which should significantly increase the FPI investment activity in the corporate bond market and encourage Indian corporates to issue unlisted NCDs/bonds to FPIs.