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27
October 2016
 |
RBI (The Total Investment & Insurance
Solutions)
The Reserve
Bank of India (RBI) has
notified the Foreign Exchange Management (Transfer or Issue of Security by a
Person Resident outside India) (Twelfth Amendment) Regulations, 2016 (Amendment) on 24
October 2016. The RBI, vide this Amendment, has come up with two major reforms,
which may boost the Indian capital market. This is in furtherance to the draft
circular issued by the RBI in
this regard a couple of months back. This Amendment adds up to the ongoing
reforms in the Indian bond market. In this write up, we intend to draw
the up the impact of the two changes in the foreign investment regime. The Total Investment & Insurance
Solutions
I. Investments in unlisted
non-convertible debt securities:
Earlier,
Foreign Institutional Investors (FII) and Foreign Portfolio Investors (FPI)
were allowed to make investments only in listed non-convertible debt securities
(NCD) issued by Indian companies and unlisted NCDs securities only where the
issuer is engaged in infrastructure sector. However, vide the Amendment, RBI
has allowed the FIIs and FPIs to invest in both listed and unlisted NCDs issued
by Indian companies, irrespective of what business the issuer is engaged in. The Total Investment & Insurance
Solutions
II. Investment in
securitised debt instruments:
This is one
of the much awaited moves by the RBI, which will be much appreciated by the
financial sector. Earlier, the regulatory framework was not facilitating enough
to allow FIIs and FPIs to invest in the securitised debt instruments issued in
India. RBI, vide this Amendment has made the following insertion in the list of
items in which FIIs and FPIs can invest:
(n) securitised debt instruments, including (i) any certificate or
instrument issued by a special purpose vehicle (SPV) set up for securitisation
of asset/s with banks, FIs or NBFCs as originators; and/or (ii) any certificate
or instrument issued and listed in terms of the SEBI “Regulations on Public Offer
and Listing of Securitised Debt Instruments, 2008. The Total Investment & Insurance Solutions
On reading
of the above text, it is quite clear, that FIIs and FPIs will be able to invest
in both listed and unlisted certificates or instruments issued by SPVs
set up for securitisation of assets. Here it is also important to note that the
originators of the assets should be either banks, FIs or NBFCs.
Permissibility of these
instruments under ECB Framework
Both of the
above mentioned instruments are in the nature of debt, therefore, it becomes
pertinent to understand the provisions of ECB Framework in this regard. The Total Investment & Insurance
Solutions
As per para
2.2 of the ECB Framework issued by the RBI , funds raised by way of issuance of
securitised instruments shall be treated as ECB for the purpose of RBI
directions. However, a specific exception was inserted vide RBI’s notification
dated 30th March, 2016, which stated that, for the term “securitised
instruments”, NCDs subscribed by FPIs shall not be considered. Therefore, the
provisions of the ECB Framework shall not be applicable where investments are
made by the FPIs in NCDs.
However, no
such exception has been carved out under the ECB Framework for securitised debt
instruments as yet and it is very logical to expect the regulator to make
changes in the ECB Framework, otherwise the whole intent of this change will
get frustrated.The Total Investment
& Insurance Solutions
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