Post the notification of the Central Government dated 17 November 2016, the Reserve Bank of India (RBI) vide a circular dated 17 November 2016, amended Schedule 5 of the FEMA (Transfer or Issue of Security by a Person Resident outside India) Regulations 2000 (RBI Amendment), permitting foreign portfolio investors (FPIs) to invest in unlisted non-convertible debentures / bonds and securitised debt instruments.  The amendment will be effective from the date of notification of the amendment in the official gazette.

Until now, investment in unlisted debt securities was permitted only in the case of companies in the infrastructure sector and FPIs were not allowed to invest in securitised debt instruments.

In line with the RBI Amendment, the Securities Exchange Board of India (SEBI) in its board meeting held on 23 November 2016 approved the amendments to the Foreign Portfolio Regulations, 2014 (FPI Regulations) permitting FPI investment in unlisted debt securities. However, a formal amendment to the FPI Regulations to give effect to the same was awaited.

After a long wait, the liberalisation in the debt market has finally come with the SEBI now amending the FPI Regulations vide the SEBI (Foreign Portfolio Investors) (Second Amendment) Regulations, 2017 (FPI Amendment Regulations) dated 27 February 2017, permitting FPI investment in unlisted bonds for corporates in all sectors and securitised debt instruments.

Under the previous regime, there was a requirement of compulsory listing of such debentures being eligible to be issued to FPI’s by corporates issuers (other than infrastructure companies). This meant that the issuer needed to file an information memorandum with the stock exchanges with extensive disclosure requirements and seek listing approvals, obtain rating compulsorily, appoint intermediaries and become a listed company subject to ongoing disclosure requirements. With the amendment to this regime, the issuance of debentures to FPIs is likely to become cheaper, faster and even more attractive than before.

So far as the securitised debt instruments are concerned, it is intended to include:

  1. any certificate or instrument issued by a special purpose vehicle (SPV) set up for securitisation of asset/s where banks, FIs or NBFCs are originators; and/or
  2. any certificate or instrument issued and listed in terms of the SEBI Regulations on Public Offer and Listing of Securitised Debt Instruments, 2008.

Further, unlike corporate bonds, investment by FPIs in securitised debt instruments is not subject to the minimum 3 year residual maturity requirement and can prove to be quite attractive for investors.

In addition, the combined total investment by FPIs in both unlisted corporate debt securities and securitised debt instruments shall not exceed INR 35,000 crore within the extant limits prescribed for investment in corporate bonds by FPIs. This limit is currently INR 2,44,323 crore.

Khaitan Comment

The amendments will encourage further foreign investments into Indian companies and provide an additional source of funds to cash strapped Indian corporates without going through the rigmarole of becoming a listed entity and obtaining a rating. The recent changes announced in the budget extending the cap on withholding tax by another 3 years for foreign investors, the amendments to the SARFEASI Act last year including debenture trustees as secured creditors for secured debt and the time bound insolvency code process will definitely boost foreign investments through the debenture route.

Further, the relaxation allowing investment in securitised debt instruments will provide a boost to the distress space and ease some strain on the banking system with foreign investments now an option.