RBI withdraws the rules for FPI investments in corporate banks

It encourages more foreign investments to access the Indian corporate debt market

The Reserve Bank of India has withdrawn the 20 per cent limit on investments by FPIs in corporate bonds of an entity with a view to encourage more foreigninvestments.
The Apex bank has relaxed its rules on foreign portfolio investors’ (FPI) holding of corporate bonds, stating that it has withdrawn its regulation whereby an FPI could not have an exposure of more than 20% of its corporate bond portfolio to a single corporate, including exposure to entities related to the corporate.

RBI’s view on FPI stipulation

In April – 2018, it was stipulated that no FPI should have an exposure of more than 20 per cent of its corporate bond portfolio to a single corporate including exposure to entities related to the corporate.
The provision was aimed at incentivizing FPIs to maintain a portfolio of assets; the market feedback indicates that foreign portfolio investors (FPIs) have been constrained by this stipulation.
In case an FPI has exposure in excess of 20%, it shall not make further investments in that corporate until this stipulation is met. A newly registered FPI shall be required to adhere to this stipulation starting no later than 6 months from the commencement of its investments
Though FPIs were given exemption from this requirement on their new investments till end-March 2019 to adjust their portfolios, the RBI has found that foreign investors were constrained due to this stipulation

RBI’s corrective measure

In order to encourage a wider spectrum of investors to access the Indian corporate debt market, it is now proposed to withdraw this provision.
This means that even if a foreign investor wants to take concentrated positions in select bonds, they will be able to do so with the removal of the 20% limit.
It will bring in a lot of foreign investors who are looking to build a part of their portfolio in India rather than build an India-dedicated fund. Those who want to buy only one or two bonds in India will be benefited.

The Difference between FPI and FDI

FPI – Foreign Portfolio Investment	FDI – Foreign Direct Investment
A foreign portfolio investment is a grouping of assets such as stocks, bonds, and cash equivalents.	It is an investment in the form of a controlling ownership in a business in one country by an entity based in another country
In economics, foreign portfolio investment is the entry of funds into a country where foreigners deposit money in a country’s bank or make purchases in the country’s stock and bond markets.	The investment may be made either “inorganically” by buying a company in the target country or “organically” by expanding the operations of an existing business in that country.
FPI investors usually expect to quickly realize a profit on their investments.	It tends to involve establishing more of a substantial, long-term interest in the economy of a foreign country.
As securities are easily traded, the liquidity of FPIs makes them much easier to sell than FDIs.	It is much more difficult to liquidate or pull out of the investment since creating or acquiring a manufacturing facility

National

Pic courtesy:Free Press Journal

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