RBI's voluntary retention route sees muted response from foreign investors

The time frame for investment may have dissuaded funds wanting to invest, say experts

The Reserve Bank of India’s voluntary retention route (VRR) has seen a muted response from foreign portfolio investors (FPIs).

The RBI threw open the VRR to investors in March in a bid to attract long-term overseas money into the debt market while ensuring operational flexibility to FPIs to manage their investments.

Investments through the VRR are in addition to the general investment limit and are capped at Rs 40,000 crore for government securities and Rs 35,000 crore for corporate bonds per annum. The investment limits under the current tranche were open till April 30 or till the limits were exhausted, whichever was earlier.

As of April 30, the allotment for government securities was nil, while that for corporate bonds stood at Rs 20,393 crore, or 58 per cent of the investment limit. Asset managers, including pension funds and hedge funds, had elicited interest in coming through this route. There was also significant interest from funds wanting to invest in stressed assets.

“The route has seen a mixed response,” said a person who deals with FPIs. “About 30-35 per cent of the general limit for government securities is still available on tap, so why would anybody go for the VRR? Corporate bonds have found takers as investors want to avoid the restrictions applicable while going through the general route.”

Investments made through the VRR will not be subject to any minimum residual maturity requirement, concentration limit or single/ group investor-wise limits applicable to corporate bonds.

“The route has just opened and considering that there was less time for execution, this was a decent response,” said Ajay Manglunia, former fixed income advisory head of a large financial services firm.

VRR norms mandate that FPIs invest 25 per cent of the committed portfolio size within one month, and the rest within three months from the date of allotment. The minimum retention period is three years or as decided by the RBI for each allotment by tap or auction.

The timeframe for investment could have dissuaded funds wanting to invest in stressed assets through the VRR. This is because FPIs can easily take two to three months to structure a stressed asset deal if one accounts for the time taken to raise funds from investors, appoint legal counsel and trustees, get the credit rating done, and deploy funds in stressed or structured credit opportunities.

There is ambiguity surrounding the computation of the committed portfolio size (CPS), which takes into account the face value of the securities and the investments in cash holdings in rupee accounts. While the computation of the CPS will happen on the face value of securities, FPIs’ investment may only be up to the discounted value of the security.

What’s more, if an FPI chooses to sell the units of a stressed asset at a lower value, the CPS may fall even though the FPI has not taken any money outside India. 

This is because till the time the FPI stays invested, the face value of the investment plus the cash account will be considered for the CPS computation. After the FPI exits the investment, only the cash account will be taken into consideration, the value of which may be lower.

Despite a relatively stable currency, FPIs remain net sellers of Indian bonds this year. The rupee depreciated 8.4 per cent to 69.77 against the dollar in 2018, but has gained 0.75 per cent this year. FPIs sold Rs 46,500 crore worth of debt papers in 2018; net sold papers worth Rs 6,882 crore this year.