Voluntary Retention Route’ (VRR) for Foreign Portfolio Investors (FPIs) investment in debt

Reserve Bank of India (RBI) vide RBI/2018-19/187 A.P. (DIR Series) Circular No.34 [1] dated May 24, 2019 have amended Voluntary Retention Route’ (VRR) Scheme for Foreign Portfolio Investors (FPIs) investment in debt. This scheme was introduced by RBI vide circular [2] dated March 1, 2019 to enable FPIs to invest in debt markets in India. but on the feedback received the Scheme have been revised.

These investments will be free of the macro-prudential and other regulatory norms 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.

Gist of VRR Scheme after changes is highlighted below:

1. Definitions
Committed Portfolio Size (CPS), General Investment Limit, Related FPIs, Retention Period, Repo and Reverse Repo, VRR-Corp and VRR-Govt, VRR- Combined have been defined under the scheme.

2. Eligible investors

Any FPI registered with SEBI is eligible to participate through this Route. Participation through this Route shall be voluntary.

3. Eligible instruments

• For VRR-Govt- Any Government Securities i.e., Central Government dated Securities (G-Secs), Treasury Bills (T-bills) and State Development Loans (SDLs).

• For VRR-Corp- Any instrument listed under Schedule 5 of FEM (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 dated November 07, 2017, other than dated Government securities/ treasury bills and Units of domestic mutual funds.

• Repo transactions and Reverse repo transactions

4. Features

• Investment through this Route shall be in addition to the General Investment Limit.
• Cap of Investment through this route for shall be capped at Rs. 75000 crore or higher, which shall be allocated among VRR-Govt , VRR – Corp and VRR- Combined as may be decided by RBI.
• The mode of allotment, allocation to VRR-Govt and VRR-Corp categories and the minimum retention period shall be announced by the Reserve Bank ahead of allotment.
• No FPI (including its related FPIs) shall be allotted an investment limit greater than 50% of the amount offered for each allotment by tap or auction in case there is a demand for more than 100% of amount offered.
• The minimum retention period shall be three years, or as decided by RBI for each allotment.
• FPIs shall invest the amount allocated, called the Committed Portfolio Size (CPS) in the relevant debt instruments and remain invested at all times during the voluntary retention period, subject to the certain relaxations.

5. Key changes of the revised VRR scheme:

• Introduction of a separate category, viz., VRR-Combined
• The requirement to invest at least 25% of the Committed Portfolio Size within one month of allotment has been removed
• FPI are provided with an additional option at the end of the retention period, viz., continue to hold their investment until the date of maturity or the date of sale, whichever is earlier.

6. The provisions for management of portfolio, other relaxations, auction process for allocation and hedging of exchange rate risk on account of investments made under the Voluntary Retention Route (VRR) have been provided in the circular.

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[1] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/APDIR187VRR1BB1700685F042D1A4F868415C6C91F5.PDF

[2] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT1351FEEE1395FD24E55842D4968AA7EF9AE.PDF