20 April, 2019
Establishment of a Branch / Liaison / Project Office in India
The Foreign Exchange Management (Establishment in India of a Branch Office or a Liaison Office or a Project Office or any Other Place of Business) Regulations, 2016 (‘Branch Office Regulations’) required prior approval of Reserve Bank of India (‘RBI’) to be obtained for opening a branch office, liaison office or project office or any other place of business in India (‘BO/LO/PO’), if the principal business of the non-resident applicant was within the defence, telecom, private security or information and broadcasting sector(s) (the ‘Relevant Sectors’). RBI, by way of its circular dated March 28, 2019, has notified that:
i. for the opening of a BO/LO/PO in the Relevant Sectors, prior approval of RBI will not be required to be obtained, if the concerned ministry or regulator in India has granted its approval or license or permission regarding such proposal. The circular clarifies that the term ‘permission’ will not include general permission, if any, available under the automatic route in respect of the abovementioned sectors (visà-vis foreign direct investment); and
ii. for proposals regarding opening of project offices in the defence sector, a separate reference or approval from the Government of India will not be required, if the applicant has been awarded a contract by, or has entered into an agreement with, the Ministry of Defence or Service Headquarters or Defence Public Sector Undertakings.
Investment by FPIs in Debt
The Securities and Exchange Board of India (‘SEBI ’) and RBI had, by way of their circulars dated June 15, 2018, inter alia , introduced a ‘per corporate’ limit, disallowing a foreign portfolio investor (‘FPI ’) from having an exposure of more than 20% of its entire corporate bond portfolio to a single corporate (including exposures to related entities of such corporate). In order to encourage a wider spectrum of investors to access the Indian corporate debt market, on February 15, 2019, RBI issued a notification withdrawing the above mentioned ‘per corporate’ limit with immediate effect. The ‘per issue’ limit for FPI s (i.e. , an FPI and its investor group may invest in any issue of corporate bonds subject to a cap of 50% of such issue) and the 20% short-term investments limit for FPI s continues to remain in place. This withdrawal is in line with the announcement made in paragraph 10 of the Statement on Developmental and Regulatory Policies of the Sixth Bi-monthly Monetary Policy Statement for 2018-19 of RBI , dated February 7, 2019.
To give effect to RBI ’s circular dated February 15, 2019, SEBI similarly withdrew this requirement by its circular dated March 12, 2019, with immediate effect.
Voluntary Retention Route for Investments by FPIs
RBI has, by way of its circular dated March 1, 2019, announced a separate scheme called the Voluntary Retention Route (‘VRR’). Investments under the VRR scheme have been open for allotment from March 11, 2019. The aggregate investment limit by FPIs under this scheme is . 40,000 crores (approx. US$ 5.5 billion) for making investments in Government securities ( GSecs, treasury bills and state development loans) and . 35,000 crores (approx. US$ 5 billion) for making investments in corporate debt instruments. The minimum retention period for investment under VRR is three years, and during this period, the FPI must maintain a minimum of 75% of the allocated amount in India. The requisite investment amount is required to be adhered to on an end-of-day basis and can include cash holdings in the Rupee accounts used for VRR.
Allocation of investment amount to FPIs under VRR must be made on-tap or through auctions. Subject to certain relaxations, FPIs are required to invest the amount allocated, referred to as the Committed Portfolio Size (‘CPS’), in the relevant debt instruments and remain invested at all times during the voluntary retention period. Successful allottees are required to invest 25% of their CPS within one month and the remaining amount within three months from the date of allotment. FPIs that wish to liquidate their investments through VRR prior to the end of the retention period may do so by selling their investments to another FPI. Investments made through VRR are not subject to any minimum residual maturity requirement, concentration limit or single/group investor-wise limits applicable to FPIs for making investments in corporate bonds
under the general investor route. FPIs investing through VRR are eligible to participate in repos for their cash management subject to certain conditions. Additionally, FPIs investing under VRR are eligible to participate in any currency or interest rate derivative instrument, whether overthe-counter or exchange traded, to manage their interest rate risk or currency risk.
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
