Introduction

The Reserve Bank of India (“RBI”) on 6th October 2015, through A.P. (DIR Series) Circular No. 19, relaxed the norms for investment by Foreign Portfolio Investors (FPIs) in government debt and also announced higher investment limits in rupee terms in government securities with a view to bring in an Rs. 1.2 lakh crores by March 2018, over and above the existing limit of Rs 1.5 lakh crores. The Medium Term Framework (“MTF”) for FPI limits in Government securities has been announced to provide a more predictable regime.

Also, with RBI easing foreign ownership in government debt, markets regulator SEBI issued detailed guidelines for hiking the overseas investment limits in such securities to Rs 1.86 lakh crores by January 1, 2016.

This article will provide a summary of the features of MTF issued by the RBI and SEBI.

Features of MTF

1. The limits for FPI investment in debt securities will now be announced/ fixed in Rupee terms.
2. The limits for FPI investment in
   • Central Government securities
     • Will be increased in phases to reach 5% of the outstanding stock by March 2018.
     • This is expected to open up room for additional investment of Rs. 1.2 lakh crores by March 2018 over and above the existing limit of Rs. 1.5 lakh crores for all Government securities.
   • State Development Loans (SDLs)
     • Will be increased in phases to reach 2% of the outstanding stock by March 2018.
     • This would amount to an additional limit of about Rs. 50,000 crores by March 2018.

3. The effective increase in limits for the following two quarters will be announced every half year in March and September.
4. For the current financial year, the limit for investment by FPIs in Government Securities will be enhanced in two tranches from October 12, 2015 and January 1, 2016 respectively as under:

*Government Securities – Long term shall include Sovereign Wealth Funds (SWFs), Multilateral Agencies, Endowment Funds, Insurance Funds, Pension Funds and Foreign Central Banks

5. The free limit as on 09th October, 2015 within Rs. 124,432 crores limit along with the new limits of Rs. 5,468 crores shall be auctioned on the exchange platform on 12th October, 2015. All other existing terms and conditions pertaining to FPI limit auctions shall continue to apply.
6. The incremental limit of Rs. 7,463 crores for Long Term FPIs and the separate additional limit for SDLs shall be available for investment on tap with effect from October 12, 2015.
7. Minimum residual maturity – 3 years
8. Cap on aggregate FPI investments in any Central Government security – 20% of the outstanding stock of the security.
   • If currently the investments levels in such securities are higher than the 20% limit, such investment may continue.
   • However no new investment shall be made through fresh purchases by FPIs till such investments fall below 20%.
9. Monitoring of Cap in FPI investments
   • Security-wise limit for FPI investments will be monitored on a day-end basis and those Central Government securities in which aggregate investment by FPIs exceeds the prescribed threshold of 20% will be put in a negative investment list.
   • This negative investment list as well as the aggregate security-wise holdings by FPIs at the end of every day will be made available by the depositories (NSDL and CDSL) on their websites.
   • The security-wise limit shall be effective from October 12, 2015.
   • No fresh investments by FPIs in these securities will be permitted till they are removed from the negative list.
   • There will be no security-wise limit for SDLs for now.
10. Investment of coupons received by FPIs on their existing investments in Central Government securities as well as SDLs shall continue to be outside the applicable limits. The terms and conditions for investment of coupons as specified vide SEBI circular CIR/IND/FIIC/2/2015 dated February 05, 2015 shall, mutatis mutandis, apply to SDLs.
11. The depositories (NSDL and CDSL) shall put in place the necessary systems for the daily reporting by the custodians of the FPIs and shall also disseminate on their websites the negative investment list, the aggregate security-wise holdings by FPIs and the coupon investment data along with the daily debt utilization data.