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The RBI on Friday gave a boost for foreign funds looking to invest in distressed assets in India and private equity (PE) players, mainly credit funds wanting to deploy their money in debt securities.
To encourage foreign portfolio investors (FPIs) willing to undertake long-term investments, the RBI on Friday proposed a special avenue called the ‘Voluntary Retention Route’ (VRR). “Under the proposed route, FPIs will have more operational flexibility in terms of instruments as well as exemptions from regulatory provisions such as cap on short-term investments (less than one year) at 20 per cent of the portfolio size, concentration limits, and caps on exposure to a corporate group (20 per cent of the portfolio size and 50 per cent of a single issue),” the RBI said.
“This is a much-awaited relaxation by the RBI for several sectors as foreign distressed funds will get a boost and credit funds will get more flexibility for investment in debt instruments. PE investors will be able to better structure debt investments,” said Bhavin Shah, Leader & Partner — FS Tax, PwC India. “Flexibility in terms of time period for re-deployment of money or churn by PEs in debt is further required. Bringing back the auction process is a fair idea.” The regulatory framework for FPI investment in debt evolved over the years, influenced by trade-offs, encouraging capital flows, the RBI said in its statement on Developmental and Regulatory Policies.
Key points of RBI’s announcement are FPIs would need to voluntarily commit to retain in India a minimum required percentage of their investments for a period of their choice and they would have to apply for investment limits through an auction process. Noting that the robustness and reliability of financial benchmarks were critical for efficient pricing and valuation of financial instruments, the RBI said ensuring the credibility of benchmarks promoted their wider adoption, which in turn facilitated efficient transmission of price signals in the financial system.
“Following the controversy surrounding the London Inter-Bank Offer Rate fixing, the IOSCO laid down principles of financial benchmarks that provide the overarching framework to ensure robust and credible benchmarks in financial markets,” the statement said.
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