RBI plans voluntary retention route to attract long-term overseas money

Foreign portfolio investors to get allocation based on how long they plan to stay invested

As a step to attract long-term overseas money in debt, the Reserve Bank of India will open “voluntary retention route” (VRR), giving Foreign Portfolio Investors (FPI) more flexibility in choice of instruments and leeway in regulatory provisions.

The investments through this route will be in addition to the existing investment avenue available to FPIs. The RBI in a discussion paper said the minimum retention period will be three years, or as decided by the regulator for each auction. The allocation of the investment amount to each FPI (called committed portfolio size, or CPS) will be based on the retention period proposed by the FPI in the bid.

FPIs can invest in both government securities and corporate bonds by way of this route. 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. Any entity registered as an FPI with the Sebi will be eligible to participate, according to the RBI's discussion paper. State Bank of India Chairman Rajnish Kumar said this will add depth to the market in terms of broad based participation.

The regulator will decide the total amount to be invested based on macro-prudential considerations and assessment of investment demand. The total amounts for investment through the route shall be separately indicated for government securities — Central government and state development loans, and corporate debt, the RBI said. These limits will be issued by way of an auction, as is being done in the present scheme for FPI investments in bonds. After allocation, successful FPIs will invest the CPS in debt instruments and remain invested at all times during the voluntary retention period.

The only relaxation that FPIs have under this scheme is they have to hold a minimum investment of 67 per cent of the CPS during the retention period. This requirement will be adhered to on an end-of-day basis. FPIs will have the flexibility of modulating investments between 67 per cent and 100 per cent of the CPS to adjust their portfolio size as per their investment philosophy.