RBI to give relief to foreign portfolio investors on some of new norms

The central bank is planning to give relief to FPIs on two of the new norms amid concerns expressed by overseas funds

The Reserve Bank of India (RBI) is planning to provide relief to foreign portfolio investors (FPIs) on some of the new norms proposed in its April 27 circular.

As per the new norms, an FPI cannot invest more than 20 per cent of its portfolio in papers that have maturity below one year.

In this regard, the central bank is considering grandfathering of existing investment since the law has currently been applied retrospectively. Grandfathering refers to a practice in which old rules continue to apply till the date a new clause has been introduced.

The restriction that an FPI cannot invest more than 50 per cent in any non-convertible debenture (NCD) issuance is also expected to be relaxed. Most private sector fundraising happens through private placements. In 2017-18, the corporate sector raised Rs 5.34 trillion through private placement as against Rs 6.40 trillion in 2016-17, according to the Securities and Exchange Board of India (Sebi).

Bond arrangers say it is common to have bilateral deals on bonds, and sometimes two or three FPIs pick up the entire debt issuances.

A limit imposition would mean that the issuer will have to negotiate with many FPIs and may even have to go for a book building process, which is cumbersome and not feasible for smaller entities.

FPIs find it attractive to go for such negotiated deals as the coupons can be as high as 18 per cent for large projects. For smaller companies, particularly in the real estate space, ratings are mostly in speculative grade.

Besides, these companies also do not get loans from banks. The coupons are much higher for them. For these companies, arranging for multiple FPIs to subscribe to their NCDs is not possible.

The issue was taken up during an inter-regulatory meeting attended by officials from the Finance Ministry, the RBI and the Sebi. Several off-shore funds had expressed concerns over the new debt norms. Sources say the central bank could also consider relaxing other contentious regulations.

A mail sent to the RBI on Wednesday remained unanswered.

Market participants say the 20 per cent cap on bonds with less than one-year maturity was an unintended fall-out. The RBI had introduced the provision as a safeguard for the new regulation. 

Before the April 27 circular, FPIs could invest only in those government securities having the minimum residual maturity of three years.

The three-year cap was introduced in July 2014 to attract only long-term investors so that portfolio outflows do not destabilise the rupee. The April circular restored the old rules, but the 20 per cent cap was new.

“Several FPIs have expressed concerns over the new norms. The 20 per cent cap will force several FPIs to sell some of their existing investments. Grandfathering such investments will soften the blow for the offshore funds,” said a source.

The rule that an FPI cannot subscribe to more than half of any corporate bond issuance has derailed several deals, especially in the real estate and infrastructure space.

Illustration by Ajay Mohanty

The companies in these sectors raise funds through structured NCDs, which are aimed at a single strategic investor. Sources say more than 30 deals in these sectors got stuck due to the new circular.

The privately placed NCD market has been affected significantly due to these new norms. The size of private NCD market is much bigger than that of publicly traded ones in India.

Interestingly, as the RBI clamped down on the NCD issuance to private payers, some real estate financiers have come up with their own public issuances, or are planning to do so in the coming days. 

If the RBI relaxes the norms, the real estate sector can place the NCDs privately with some ease.  In any case, the real estate companies and their financiers raise funds at prohibitively high rates. NCDs issued for project finance can reach even 18 per cent in some cases.

“The rule has affected several deals on the ground. There should not be any limit on how much an FPI can subscribe in an NCD issuance.

The RBI regulations already state that an FPI’s exposure to a single company or group cannot exceed 20 per cent of its total investments. Not all FPIs are large institutions, there are several FPIs who invest in select issuances depending on their expertise in specific sectors,” said Tejesh Chitlangi, partner, IC Universal Legal.

In the circular, the RBI had also limited FPIs from investing more than 20 per cent of their portfolio in a single company or group of companies. In case of any violations, the FPI will not be allowed to make any further investments in that corporate until the cap is met.