The Reserve Bank of India (RBI) has amended the guidelines with regards to investments made in the country by foreign portfolio investors (FPI). The amended guidelines have been issued with immediate effect.

While overseas investments for short-term government bonds have been eased, there are new restrictions on FPIs restricting them to no more than a 50 percent investment in a single corporate bond; and they cannot invest more than 20 percent in a single corporate entity.

The capping of FPIs may further hinder the progress of the renewable energy sector in India by restricting investment inflows. It is already challenging to access capital in India in the solar sector due to reluctance of financial institutions, investors, and banks to pump in the required capital. FPIs are an important source of financing for some companies in the Indian renewable energy sector.

Key highlights of the amended guidelines:

• The minimum residual maturity requirement for Central Government securities (G-secs) and State Development Loans (SDLs) categories has been withdrawn.
• Investment in securities with residual maturity below 1 year by an FPI under either G-secs or SDLs will not exceed, at any point of time, 20 percent of the total investment of FPI in that category.
• FPIs have been permitted to invest in corporate bonds with minimum residual maturity of above one year.
• The cap on aggregate FPI investments in any G-sec has been increased to 30 percent of the outstanding stock of that security.
• Utilization of FPI limits will be monitored online after June 1, 2018, by Clearing Corporation of India Ltd. (CCIL).
• Investment by any FPI, including investments by related FPIs, will not exceed 50 percent of any issue of a corporate bond.
• In case an FPI has invested in more than 50 percent of any single issue, it will not make further investments in that issue until this stipulation is met.
• No FPI will have an exposure of more than 20 percent of its corporate bond portfolio to a single corporate (including exposure to entities related to the corporate).
• In case an FPI has exposure in excess of 20 percent to any corporate (including exposure to entities related to the corporate), it will not make further investments in that corporate until this stipulation is met.
• A newly registered FPI will be required to adhere to this stipulation starting no later than 6 months from the commencement of its investments.

When contacted, a Greenko official told Mercom, “RBI has introduced these new guidelines last week which will adversely affect solar investments into India by foreign entities. Earlier, large overseas investments to Indian solar companies would flow through Foreign Direct Investment (FDI) or FPI. An overseas holding company would generally invest in an Indian holding company which would distribute the investments to various SPVs, that way avoiding the payment of tax.”

“The new guidelines issued by RBI on Friday says FPIs cannot invest more than 50 percent in a single corporate bond and cannot invest more than 20 percent in a single corporate. This means that the investments have to be brought in as equity, which will increase the cost of investment. They have to pay equity dividends to both the domestic and foreign holding companies to the tune of 14-16 percent each and in order to withdraw money from their investments, they have to declare dividends which will attract huge dividend distribution tax,” added the Greenko official.

Vinay Kumar, the managing director of India Renewables, Brookfield, said, “In the renewable energy sector, capital is always under question. NCDs (non-convertible debentures) contribute a major share of capital inflow. With the new amended guidelines, it will not be possible to get the currently utilized NCD structures to fund wind and solar projects at special purpose vehicle (SPV) level.”

When asked about other ways of bringing in capital, Kumar said, “We can utilize shareholder loans, Track-III external commercial borrowing (ECB), but there is an interest cap on that of G-sec+450 basis points.” But, this will be less flexible than the NCD structure and ECBs can be done up to 7 times the equity value, which proves to be an additional constraint.”

Another executive at a major domestic renewable energy company spoke to Mercom in detail about the consequences of the RBI amendment, underlining its repercussions for the industry stakeholders. “RBI withdrew a rule that mandated FPIs to invest in government bonds with at least three years of residual maturity. However, investments in bonds with maturity below a year must not exceed 20 percent of the total investment of that FPI. RBI has increased the aggregate FPI investments in a single government bond to 30 percent of outstanding stock from the earlier 20 percent. This goes favorable for government bonds.

Now, FPIs are free to buy corporate bonds with at last one year of residual maturity, against three years earlier. This is beneficial for FPIs who invest for short term intent.

Investment by any FPI, including investments by related FPIs, should not exceed 50 percent of any issue of a corporate bond. Earlier, there was no restriction on this. Thus, this will be adverse for investments in corporate bonds”.

Elaborating further on the amendment, the official said that though RBI has given no reason for this move, market speculates that such changes reflect RBI’s review of the bond market, which is struggling with lower demand and rising yields.

“The intent is to promote FPI investment in government bonds and to control investment by FPIs in Indian corporates. In the last 2-3 years, Indian corporates have issued NCDs to FPIs. Many solar players have also issued NCDs to their foreign affiliates. Now, RBI has put a cap on such things. The restrictions imposed by RBI will affect issuance of NCD in the future. For the past, RBI may provide a grandfather clause. Certain foreign companies invest in equity under FPI regulations as valuation rules don’t apply to this route.  However, shareholders can’t exceed 10 percent in this case,” the executive added.

NCD is used as a repatriation instrument like Compulsory Convertible Debentures (CCD), Redeemable Preference Shares (RPS), Compulsorily Convertible Preference Shares (CCPS), and External Commercial Borrowings (ECB). To subscribe to the NCD, a foreign parent or affiliate needs to obtain FPI registration in India and comply with certain restrictions. NCDs are generally used by Indian companies which intend to downstream their funds or circulate funds across a group of Indian companies as there are no end-use restriction.

Image credit: By Shivamsetu [CC BY-SA 4.0], from Wikimedia Commons