Foreign Investment in Corporate Debt

[Vinita Sithapathy,
who is a lawyer and a company secretary, has contributed the following post.
Vinita graduated from Government Law College, Mumbai in 2008. She has advised
clients on banking and finance and corporate M&A transactions since 2008.
She can be contacted at [email protected]]
month, the Reserve Bank of India (RBI)
introduced some amendments to its existing regime of corporate and
infrastructure debt available for investment by foreign institutional investors
(FIIs). Under the existing regime,
FIIs could invest within an overall limit of USD 45 billion in non-convertible
debentures in the corporate and long-term infrastructure debt category. This
was split into USD 25 billion for investment into infrastructure debt and USD
20 billion for investment into corporate non-infrastructure debt. The
infrastructure category was further sub-divided into a USD 22 billion limit for
investment by FIIs and a separate limit of USD 3 billion for investment by
entities that fell within the meaning of ‘qualified foreign investors’ (QFIs). Investment by FIIs into
infrastructure debt was also subject to the following conditions:
(i)        Original Maturity
The original maturity
period of the non-convertible debentures (NCDs)
was required to be at least 5 years. Original maturity is understood as the
original term of the NCDs at the time of issuance.
(ii)       Residual Maturity
The residual maturity of
the NCDs at the time of first purchase by an FII is required to be at least 15
months. Residual maturity is the term of the NCDs that is remaining when an FII
purchases the NCDs. This condition applies only the first time a purchase is
made by an FII. For any subsequent purchases by an FII, this requirement will
not apply.
Investments by QFIs were
to be made in mutual funds that invested in the infrastructure debt sector in
investments with a residual maturity of 5 years. Subsequently QFIs were
permitted to invest in mutual funds that held 25% of their assets in the
infrastructure sector (whether debt or equity). It wasn’t clarified whether the
residual maturity requirement continued to apply to the debt investments of
such mutual funds, but it was assumed that it would.
(iii)      Lock in period
Investments in the NCDs
were required to be locked in for a period of 1 year although trading between
FIIs was permitted during the lock in period.
recent circular has amended the position as follows:
– Limits for investment
in the corporate non-infrastructure debt category have been enhanced from USD
20 billion to USD 25 billion. In addition to FIIs, the additional USD 5 billion
limit is also available for investment to other categories of investors like
sovereign wealth funds, pension funds, multilateral agencies and foreign
central banks registered with the Securities and Exchange Board of India (SEBI) as investors. This category of
investors was earlier entitled to invest only in infrastructure debt funds (IDFs).
– RBI has also removed
the requirement of original maturity and lock in period under the
infrastructure debt category (i.e. within the USD 22 billion limit). The
residual maturity requirement of 15 months at the time of first purchase by an
FII remains as is.  
– The residual maturity
requirement for mutual fund investments of QFIs has been done away with and
replaced by an original maturity requirement of 3 years.
investments in infrastructure debt that contain embedded put/call options, SEBI
has specified that the date of the put/call option will determine the residual
maturity i.e. FIIs could make upfront investments into NCDs with put/call
options only if the date of the put/call option was at least 15 months after
the date of the investment. Most FII investments in infrastructure sector NCDs
(with original maturity of 5 years) were made with embedded put/call options
that allowed the FII to exit at the end of 15 months. RBI’s amendment now provides
an early exit to investors without having to structure a put/call in the NCDs and
a pseudo-original maturity period to comply with the regulations. While
investors are most likely to welcome these amendments, this category is
probably no more the “long-term” infrastructure debt category.

The recent circular of RBI amending the regime
is available at
and the SEBI circular following that and summarising RBI’s amendments is
available at

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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