RBI Issues New Circular on Foreign Investment in Credit-Enhanced Debt

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Nov. 15 – The Reserve Bank of India has issued a new circular designed to increase capital inflows by allowing foreign investors to purchase credit-enhanced bonds issued in India. The new decree, Circular No. 74, will allow foreign institutional investors (FII) and qualified foreign investors (QFI) to purchase a total of US$5 billion in domestically issued credit-enhanced bonds.

A credit-enhanced bond is a debt instrument issued with a third-party guarantee, often in the form of collateral or cash promises. These enhancements improve the bond’s credit rating and lower the issuing company’s interest obligations, resulting in a lower cost of debt.

As per Circular No. 94, issued in April of this year, the maximum investment quota for FIIs will remain fixed at US$51 billion for corporate debt and US$25 billion for government-issued debt.

Under Circular No. 120, both domestic and eligible non-domestic institutions may provide credit enhancement to bonds issued in India. These include multilateral/regional financial institutions, government-sponsored development banks and non-resident entities eligible to raise external commercial borrowings.

By allowing foreign participation in the market for credit-enhanced bonds, the RBI hopes to attract greater capital inflows from foreign institutional investors, who are often restricted to top-rated debt investments. An increase in capital inflows will also boost the value of the rupee, which has seen a rapid decline in purchasing power this year.

According to the Securities and Exchange Board of India (SEBI), a foreign institutional investor is “an entity established or incorporated outside India which proposes to make investment in India.” These entities may include pension funds, mutual funds, insurance companies, investment trusts and foreign banking institutions. Public companies listed in India may receive up to 24 percent investment by SEBI-approved FIIs.

A qualified foreign investor may be an individual, group, or association residing in a member-country of the Financial Action Task Force (FATF) or in a country that has signed the International Organization of Securities Commissions’ Multilateral Memorandum of Understanding. A QFI is eligible to participate in Indian mutual funds and Indian equity schemes. An Indian company may have an aggregate QFI ownership stake of 5 percent of the company’s paid up capital.

The new circular, which goes into effect immediately, will also allow sovereign wealth funds, foreign central banks and multilateral agencies to invest in India’s credit-enhanced bonds.

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