Ever since India registered a significant jump from 130th place to 100th place in the World Bank Ease of Doing Business Report, the central government and the Reserve Bank of India (RBI) have re-examined certain norms related to overseas investors – the objective being to encourage overseas investors to invest more funds in India and to sustain the prospect of ease of doing business sentiment in India.

Following the failure of the weekly sovereign bonds auctions to elicit the interest of the overseas investors, the RBI recognized the need to revisit certain Foreign Portfolio Investors (FPI) norms to protract the interest of foreign investors in Indian capital markets.

Accordingly, RBI has detached the norm that disqualifies FPI to invest in Indian bonds with less than 3 years of maturity term with the intent to enhance FPI participation in domestic bond market – Now FPI are authorized to invest in corporate bonds with minimum residual maturity term of more than 1 year.

The minimum residual maturity requirement for Central Government securities and State Development Loans (SDLs) categories is withdrawn provided that investment in securities with residual maturity below 1 year by an FPI.

The eased norms facilitate FPIs to invest in residual maturity papers (with less than one year maturity term) 1/5th part of their total investment. However, investment by a foreign investor in any corporate bond issuance should not exceed more than 50% of the bond worth.

Another norm (practice of auctioning limit following the overall FPI limit crosses more than 90% of the prescribed threshold limits) is also detached to facilitate investors to lap up the domestic debt securities quickly.

It is expected that for 2018-19 FY – FPIs would be allowed to invest up to 5.5 per cent of outstanding stock of government securities (G-secs) and 6 per cent of outstanding stock of securities in the FY 2019-20.  For FY19 and FY20, G-sec limit is expanded for inclusion of ploughing-back of interest income from G-secs in the same instrument that had no limits.

One can expect that the relaxed norms will certainly encourage foreign investors to explore the financial prospects of the Indian capital market by utilizing the eased norms to the best of their advantage – reinforce the flow of foreign funds into Indian capital markets – which will ultimately shot in the arm the prospect of the ease of doing business sentiment in India.

Research inputs by Paruchuri Baswanth Mohan