The Reserve Bank of India has relaxed the provision that barred foreign portfolio investors (FPIs) from having more than 20% exposure of their total corporate bond portfolio towards a single corporate entity.
The relaxation comes nearly 10 months after the cap was first put in place in April last year wherein it was mandated that FPI investment in a bond issue could not be more than 50% of the issue, while capping single corporate exposure of overseas investors at 20%.
“While the provision was aimed at incentivising FPIs to maintain a portfolio of assets, further market feedback indicates that FPIs have been constrained by this stipulation,” stated the RBI release.
“In order to encourage a wider spectrum of investors to access the Indian corporate debt market, it is now proposed to withdraw this provision. A circular to this effect will be issued by mid-February, 2019,” it added.
Market participants have welcomed the relaxation and believe that not only FPIs but debt mutual funds would also benefit from the move.
“Thanks to the regulator, the short end of the curve will see greater participation from FPIs now across both corporate bonds as well as G-secs,” said Gautam Kalia, head — investment products, Sharekhan. “This should translate to greater liquidity in the debt market and is overall good news for the debt mutual fund investors who have earned lower than expected returns and have been plagued with downgrades and negative news flow on securities held by some debt mutual fund schemes. With greater scope of participation by FPIs and higher liquidity, mutual funds can better cater to the needs of the retail investor now,” he added.
Meanwhile, when the limits were announced in April last year, FPIs were given exemption from the requirement on their new investments till end-March 2019 to adjust their portfolios.
“The decision to remove the 20% single issuer limit for corporate bonds is a good move as it had hampered genuine foreign investor flows into corporate bonds,” said Pankaj Pathak, fund manager - fixed income, Quantum Mutual Fund, while adding that large flows, however, should not be immediately expected due to fiscal concerns and political uncertainty.
