Chennai: In its effort to maintain a steady inflow of foreign capital, the Reserve Bank of India (RBI) brought out a discussion paper on ‘Voluntary Retention Route (VRR)’ for investment by foreign portfolio investors.
The discussion paper also looks at attracting long-term capital in the debt market and has come up in consultation with the government and capital market regulator Sebi. VRR is proposed to be a separate channel that will enable FPIs to invest in debt markets in India, RBI said in its discussion paper on Friday.
“Broadly, investments through the Route (VRR) will be free of the macro-prudential and other regulatory prescriptions applicable to FPI investments in debt markets, provided FPIs voluntarily commit to retain a required minimum percentage of their investments in India for a period of their choice,” RBI said.
RBI said the participation through this route will be entirely voluntary and entity registered as an FPI with Sebi will be eligible to participate in VRR.
“The objective of the VRR channel is to attract long-term and stable FPI investments into debt markets while providing FPIs with operational flexibility to manage their investments,” as per the discussion paper.
RBI said the total amount of investment under VRR will be decided by it from time to time based on macro-prudential considerations and assessment of investment demand. Investments through this Route shall be in addition to the FPI investment limits (general investment limit) under the Medium Term Framework.
The total amount for investment through the Route shall be separately indicated for government securities (Central Government securities as well as State Development Loans, VRR-Govt) and corporate debt (VRR-Corp).
“Under the proposed Route, FPIs will have more operational flexibility in terms of instrument choices as well as exemptions from regulatory provisions such as the cap on short-term investments (less than one year) at 20 per cent of portfolio size, concentration limits, and caps on exposure to a corporate group (20 per cent of portfolio size and 50 per cent of a single issue),” RBI said.
To be eligible to invest under this route, it said, FPIs will need to voluntarily commit to retain in India a minimum required percentage of their investments for a period of their choice. FPIs would apply for investment limits under the route through an auction process, it said.
“Following the controversy surrounding the London Inter-Bank Offer Rate (LIBOR) fixing, the International Organization of Securities Commissions (IOSCO) laid down principles of financial benchmarks that provide the overarching framework to ensure robust and credible benchmarks in financial markets,” the statement said.
Accordingly, to improve the governance of the benchmark processes, it is proposed to introduce a regulatory framework for financial benchmarks, which shall apply, initially, to benchmarks issued by the Financial Benchmarks of India Ltd (FBIL), it said.
In this regard draft regulations will be issued by the end of October, it added. The regulator has invited comments on the discussion paper from market participants and other interested parties by 19 October.
| Norms issued for trading platforms |
| The RBI has also issued guidelines for operating Electronic Trading Platforms (ETP) to transact in eligible instruments. Trading on electronic platforms is being encouraged across the world as it enhances pricing transparency, processing efficiency and risk control.
It also enables better market surveillance and, therefore, discourages market abuse and unfair trading practices. As per the norms issued by the central bank ETPs will mean any electronic system, other than a recognised stock exchange, on which transactions in eligible instruments. “No entity shall operate an ETP without obtaining prior authorisation of the Reserve Bank under these directions,’ it said. ‘An entity seeking authorisation as an ETP operator under the directions will maintain a minimum net-worth of Rs 5 crore and will continue to maintain the minimum net-worth prescribed at all times,” it said. |