Annexure A

FPI investment into NCDs – Simple FPI Route

The main features of the Simple FPI Route for investment into NCDs are as follows1:

  • Regulatory oversight

    While FPIs are regulated by SEBI, SEBI has clarified under the SEBI (Foreign Portfolio Investors) Regulations, 2019 (“FPI Regulations”) and the operational guidelines issued thereunder, that FPIs shall also be required to comply with terms, conditions or directions, specified or issued by RBI, from time to time for investment into NCDs. No separate circular(s) shall be issued by SEBI.

  • Investment instruments

    As per the Foreign Exchange Management (Debt Instruments) Regulations, 2019 (“FEMA Debt Regulations”), read with the SEBI (Foreign Portfolio Investors) Regulations, 2019, an FPI can invest in, among others, non-convertible debentures/ bonds issued by an Indian company. The NCDs were earlier required to be mandatorily listed or to be listed (i.e. listed within 15 days of the allotment). However, FPIs are now permitted to invest in unlisted NCDs as well.

  • Minimum residual maturity

    Investments by FPIs into NCDs under the Simple FPI Route shall be subject to a minimum residual maturity of 1 year. The minimum residual maturity was earlier 3 years, and was reduced to 1 year in 2018.

  • Maximum investment by FPIs

    The regulations issued by the RBI prescribe that investments by FPI under the Simple FPI Route in short term investments (defined as investments with a residual maturity of 1 year) shall not exceed 30% of the entire investment of the FPI in corporate bonds. The 30% limit is to be looked at on an end of day basis daily. The interesting aspect of the 30% limit is that the same is looked at on a daily basis, with the residual tenure of the investment reckoned from that day itself. Accordingly, an NCD which is not reckoned as a short-term investment shall be deemed as short-term investment with the passage of time.

  • FPI facilitators

    • Domestic Custodian: Under the FPI Regulations, the designated depository participant (“DDP”) engaged by an FPI shall, pursuant to an agreement between the FPI and the DDP, act as custodian of securities (the “Custodian”) for the FPI in India. The Custodian shall monitor and report the investments of FPI in India, preserving its records of investments and furnishing the afore-mentioned information to SEBI as and when requested for.

    • Domestic Bank: An FPI is required to appoint a local bank, as authorized by the RBI, as its banker in India. The FPI is required to open a foreign currency denominated account and a special non-resident rupee account with the local bank. Under the extant exchange control laws, the FPI is required to remit the funds first into the foreign currency account from where the funds will get transferred to the special rupee account. Investment activities of an FPI in India will be carried out through the special rupee account. At the time of repatriation of the funds, the funds will be transferred from special rupee account to the foreign currency account, subject to payment of applicable taxes, if any, for repatriation out of India.

    • Compliance Officer: The FPI Regulations require every FPI to appoint a compliance officer who shall be responsible for monitoring the compliance of the FPI with applicable laws. The compliance officer is further required to immediately and independently report to SEBI and the relevant DDP, any non-compliance observed by him as per the FPI Regulations.

  • Taxation

    • Principal repayment

      Any repayment of principal by the Indian borrower company shall not attract any taxes.

      Interest:

    • Any interest payable on the NCDs by the borrower shall be subject to a reduced withholding tax of 5%, provided that the interest payable on the NCD is within the limits prescribed under the Indian Income Tax Act, 1961 (SBI Base Rate as on the date of the issuance of the NCDs + 500 basis points). This reduced withholding rate is applicable for all interest payable till July 1, 2023. Post July 1, 2023 (unless extended further), or if the interest charged is higher than the interest permissible, the withholding tax obligation will be higher, could be up to 20% (instead of 5%).


 

Annexure B

Voluntary Retention Route

The main features of the VRR are as follows:

  • Eligible instruments

    FPIs are permitted to invest in, inter alia, all securities listed under Schedule 1 to the Foreign Exchange Management (Debt Instruments) Regulations, 2019 (“FEMA Debt Regulations”)2. These include non-convertible debentures/ bonds issued by an Indian company. Accordingly, non-convertible debentures issued by Indian companies (whether listed or unlisted) are permitted instruments for FPIs to invest in.

  • Committed Portfolio Size

    Under the VRR, the FPI applies / bids for allocation of limits under the VRR, and the limit allotted to the FPI is referred to as the Committed Portfolio Size (“CPS”). The VRR provisions provide that an individual FPI shall not be allotted more than 50% of the amount offered under each allotment or auction.

    An FPI is expected to invest a minimum of 75% of the CPS within 3 months from the date of allotment, and this limit of 75% of the CPS shall remain invested throughout the Retention Period (see below).3 The continuous investment of 75% of the CPS being invested in seen on a day to day / end of day basis. It would be pertinent to note that (i) cash holdings in the FPI Rupee Account (see below) shall be reckoned for computation of funds invested; and (ii) only the face value of securities invested in shall be considered for computation of funds invested. Income from investments may be re-invested, even if such amount is in excess of the CPS.

  • Retention period

    When submitting an application / bidding for limits under VRR, an FPI is required to voluntarily commit the time-period for which the CPS shall be invested in India (such period referred to as the “Retention Period”). The minimum Retention Period is 3 years upfront, or as notified by RBI at the time of each allotment. The Retention Period commences from the date of allocation of the limit (and not the date of investment).

    • Exit during Retention Period: During the Retention Period, the FPI may transfer their investments to another FPI(s), and the transferee FPI(s) shall be bound by the terms and conditions applicable to the transferor FPI. Further, in case of any transfer of instruments to any other person, the FPI is not permitted to repatriate the proceeds from such transfer, if the amounts invested falls below 75% of the CPS.
    • Exit post the Retention Period: The FPIs are free to exit or stay invested in India upon the expiry of the Retention Period. Accordingly, the FPI may (i) liquidate the portfolio and exit; or (ii) hold the investments until date of maturity or until sold. In addition, the FPI may transfer the investments to another FPI or shift the investments under general limits for FPIs (if available at such time).

  • Other features

    • Restrictions: The concentration limit or the minimum maturity requirements applicable for other FPI investments in NCDs are not applicable in case of investment under the VRR.
    • Separate SNRR Account: The FPI is mandatorily required to open a separate special non-resident rupee account (“SNRR Account”) for investment through the VRR, and all funds / cash flows for investment under VRR shall be reflected in this SNRR Account. The FPI may, at their discretion, open a separate securities account for the purpose of securities acquired by it under the VRR.
    • Compliance obligation: The FPI and the custodian of the FPI are responsible for compliance with the VRR.

  • Process for obtaining allocations

    The VRR circulars provides that the RBI may come out with the mode of allotment from time to time.

  • Taxation

    • Principal repayment: Any repayment of principal by the Indian borrower company shall not attract any taxes.
    • Interest: Any interest payable on the NCDs by the borrower shall be subject to a reduced withholding tax of 5%, provided that the interest payable on the NCD is within the limits prescribed under the Indian Income Tax Act, 1961 (SBI Base Rate as on the date of the issuance of the NCDs + 500 basis points). This reduced withholding rate is applicable for all interest payable till July 1, 2023. Post July 1, 2023 (unless extended further), or if the interest charged is higher than the interest permissible, the withholding tax obligation will be higher, could be up to 20% (instead of 5%).

 

1 For a general overview of the SEBI (Foreign Portfolio Investors) Regulations, 2019 which governs FPIs, please click here.

2 The instruments permitted under Schedule 1 of FEMA Debt Regulations are as follows:

  1. a) non-convertible debentures/ bonds issued by an Indian company;
  2. b) commercial papers issued by an Indian company;
  3. c) Security Receipts (SRs) issued by Asset Reconstruction Companies;
  4. d) debt instruments issued by banks, eligible for inclusion in regulatory capital;
  5. e) Credit enhanced bonds;
  6. f) Listed non-convertible/ redeemable preference shares or debentures issued in case of merger / demerger / amalgamation of Indian companies out of its general reserves by way of distribution as bonus to the shareholders resident outside India;
  7. g) Securitised debt instruments, including (i) any certificate or instrument issued by a special purpose vehicle (SPV) set up for securitisation of asset/s with banks, Financial Institutions or non-banking financial companies as originators;
  8. h) Rupee denominated bonds/ units issued by Infrastructure Debt Funds
  9. i) Municipal Bonds; and
  10. j) Investments in units of exchange traded funds investing only in debt instruments.

3 Considering the time limit of 3 months, custodians insist on the FPI approaching the custodian for the allotment of the limit immediately prior / post the execution of binding documents or the fulfilment of the conditions for investment (whichever is later). The time period has been extended to 6 months due to Covid for limits availed between January 24, 2020 and April 30, 2020.