Investment by Foreign Portfolio Investors (FPI) in Defaulted Bonds – Relaxations

Reserve Bank of India (“RBI”) vide Circular no. 31 dated November 26, 2015, had allowed Foreign Portfolio Investors (“FPI”) to buy bonds that are either fully or partially under default in repayment and had raised the maturity period of such Non-Convertible Debentures/ Corporate Bonds (“NCDs/bonds”) to ‘3 (three) years and more’. At present, FPIs can invest in security receipts and debt instruments issued by Asset Reconstruction Companies and debt instruments issued by an entity under the insolvency process as these investments are exempted from the short-term limit and minimum residual maturity requirement under the Medium-Term Framework (“MTF”).

Following the circular mentioned above, a Statement on Developmental and Regulatory Policies dated February 05, 2021 was issued, whereby it was announced that FPI investment in defaulted corporate bonds will be exempted from the short-term limit and the minimum residual maturity requirement under the MTF.

Currently, FPI investments in corporate bonds are subject to a minimum residual maturity requirement, short-term investment limit and the investor limit in terms of various direction issued by RBI. The latest circular dated February 26, 2021 in this regard decides to exempt investments by FPI in NCDs/bonds which are under default, either fully or partly, in the repayment of principal on maturity or principal instalment in the case of amortising bond.