RBI may release new limits for voluntary retention route in two weeks

Likely to allow FPIs to extend initial investment period from 1 to 3 months

The Reserve Bank of India (RBI) is expected to release new limits for its voluntary retention route (VRR) in a week or two, according to people in the know. Instead of a tranche, the central bank may allow the limits to be allocated on tap this time. 

The banking regulator may also consider extending the period for initial investment from one to three months. As of now, FPIs have to invest 25 per cent of the committed portfolio size (CPS) within one month and the remaining in the next two months. 

The timeframe for investment can be especially onerous for funds wanting to invest in stressed assets through VRR. 

This is because foreign portfolio investors (FPIs) can easily take 2-3 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. “The RBI has taken feedback from market participants and may tweak the VRR norms, but substantial changes are unlikely at this point,” said a person familiar with the matter. 

The first tranche of VRR saw a mixed response, with 58 per cent of the corporate bonds limit getting allotted till the closing date of April 30.

The allotment for government securities was nil. Asset managers, including pension funds and hedge funds, had expressed interest in coming through this route. At present, there is ambiguity surrounding the computation of CPS, which takes into account the face value of the securities and the investments in cash holdings in rupee accounts. 

While 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 CPS computation. 

After the FPI exits the investment, only the cash account will be taken into consideration, the value of which may be lower. 

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.

Despite a relatively stable currency, FPIs remain net sellers of Indian bonds this year. FPIs have net sold papers worth Rs 6,974 crore this year, in addition to Rs 46,500 crore worth of debt papers sold in 2018.