Foreign Portfolio Investments in Unlisted Non-Convertible Debentures

[The following post is contributed
by Amitabh Robin Singh, who is a corporate
lawyer practising in Mumbai.]
month, the Reserve Bank of India (“RBI“)
allowed Foreign Portfolio Investors (“FPIs“)
to invest in unlisted non-convertible debentures (“NCDs“). This has been done by way of an amendment
Foreign Exchange Management (Transfer or Issue of Security by a Person Resident
outside India) Regulations, 2000 (“FEMA
Earlier, FPIs were permitted to
invest only in NCDs which are either listed or to be listed. Where they are to
be listed, such listing must take place within 15 days of investment made in
them. There was a carve-out to this rule which permitted FPI investment in
unlisted NCDs in the infrastructure sector (as defined in the guidelines
governing external commercial borrowings).
Under the new provision which
Schedule 5 of FEMA 20, FPIs will be allowed to invest
in unlisted NCDs irrespective of the sector in which the issuing company
operates. The RBI
announcing the new regime lays down certain end use restrictions, being
investment in real estate business (as defined in FEMA 20), capital markets and
purchase of land.
This is a welcome move and may
spur investments in the Indian corporate bond market, due to the fact that the
company which is issuing the NCDs will not be required to undergo the listing
process nor will it need to comply with the applicable chapters of the Securities
and Exchange Board of India (“SEBI“)
(Listing Obligations and Disclosure Requirements) Regulations, 2015.
Another benefit to the investee
company is that it will no longer be required to comply with certain provisions
of the Companies Act, 2013 (“Companies
“) which apply to listed companies. sections 177 and 178 of the
Companies Act mandate that “every
listed company
” constitute an audit and nomination and remuneration
committee respectively. Under the status quo, this even includes private
companies which have listed only their NCDs. However, the Companies Law
Committee in its report of February of this year suggested that this anomaly be
remedied by modifying sections 177 and 178 to exempt private companies which
have listed NCDs as per SEBI guidelines. Pursuant to this, the Companies
(Amendment) Bill, 2016 (“Amendment
“) (which is currently pending in parliament) proposes to amend sections
177 and 178 to change the threshold to “every listed public company“. Hence, if the Amendment Bill
becomes law in its present form, the (private) investee company that is listing
only its NCDs will be relieved from the obligation to constitute the
abovementioned committees. An interesting point to consider here is that the
Amendment Bill does not intend to exclude a public company which has not listed
any of its securities other than NCDs.
Hence, as we can see, the issuer
of the NCDs will be relieved from certain listing costs and compliances such as
submitting financial results to the relevant stock exchange, etc. Also, pending
passage of the Amendment Bill, exemption from certain Companies Act compliances
will be had due to the fact that the NCDs are not listed.
However, one significant
stumbling stone for this policy may be related to the ability to avail of
certain benefits under the
Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002 (“SARFAESI“). It may
be noted that the Enforcement of Security Interest and Recovery of Debts Laws
and Miscellaneous Provisions (Amendment) Act, 2016 was lauded for extending the
benefits available to a “secured
” to debenture trustees registered with SEBI appointed by any
company for secured “debt securities“.
However, the definition of the term “debt
” is restricted to debt securities listed in accordance with
SEBI guidelines. Now, while investors who have subscribed to or purchased listed
NCDs will be able to avail of the quicker and more effective process of
enforcement of security contemplated under Section 13 of SARFAESI, the holders
of unlisted debentures will have no such benefits.
In pursuance to the amendment to
FEMA 20, SEBI’s board, in its meeting of November 23, 2016 has decided to amend
the SEBI (Foreign Portfolio Investors) Regulations, 2014 to make unlisted NCDs a
permissible instrument for FPI investment. This will be done by amending
Regulation 21 (Investment Restrictions,)
of the said regulations to reflect the new position.
while this move to allow FPI investment in unlisted NCDs is a step in the right
direction to garner the interest of foreign investors in the Indian corporate
bond market, it may fall short on the aspect of enforcement of security
interest. As a result of this, it may be unable to generate the amount of
inbound investments as envisaged.
– Amitabh Robin

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.


  • According to FEMA, 2017, i.e. after the amendment, are there any changes made? If yes, can you please highlight those.
    Thank you.

  • Hey Robin.. Thanks for the informative read.

    Will a foreign NCD holder be in any case allowed to take benefit under Section 13 of the SARFAESI, irrespective of whether the NCDs are listed, given that the SARFAESI is limited to domestic creditors?

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