ANALYSING THE AMENDMENTS TO ECB AND FPI POLICY

INTRODUCTION

To mitigate the surging downwards pressure on the Indian Rupee (“INR”) and address the
depletion in forex reserve from the retrenchment of portfolio flows, the Reserve Bank of India
(“RBI”) has notified a range of regulatory relaxations to attract foreign investments in the
domestic debt market. The liberalization measures inter alia include amendment in External
Commercial Borrowing (ECB) policy and relaxation in eligibility and regulatory provisions vis-
a-vis foreign portfolio investments in Indian debt through the Medium-Term Framework
(“MTF”), the Voluntary Retention Route (“VRR”), and the Fully Accessible Route (“FAR”).

Considering these amendments, this article analyses the regulatory structure governing foreign
investments in the Indian debt market. It further attempts to gauge the opportunities that the
measures enabling the liberalization of capital accounts bring for Indian businesses and assess
the challenges impeding their successful operationalization.

AMENDMENTS TO THE EXTERNAL COMMERCIAL BORROWING POLICY

External Commercial Borrowings (“ECB”) are debts raised by eligible resident businesses from
non-resident entities through authorized dealers. In India, these borrowings are regulated by the
RBI under Foreign Exchange Management (Borrowing and Lending) Regulations, 2018.
Following the liberalization of the Indian economy and the advent of globalization, the central
bank has undertaken a series of reforms in the ECB Policy to eliminate regulatory hurdles and
facilitate easy access to external borrowings for eligible domestic businesses.

The liberalization of the ECB Policy enabled an Automatic Route for eligible businesses to raise
ECB from the international market without approaching the Central Bank for approval. The
eligible borrowers can raise external debt in any freely convertible foreign currency through the
Authorized Dealers (“AD”) (authorized under Subsection (1) of Section 10 of the Foreign
Exchange Management Act, 1999).

Building up on the series of post-1991 liberalization measures vis-à-vis capital account, the
amendments widen the avenues of forex inflow in the economy. They provide eligible businesses
with an opportunity to raise higher debt from the international market at lower costs and further
the ease of doing business in the country by eliminating the regulatory hurdles.

FPI INVESTMENTS IN DEBT THROUGH FAR, VRR, AND MTF

The liberalization of ECB policy has been accompanied by relaxation in regulations governing
the inflow of Foreign Portfolio Investments (“FPI”) in Indian debt instruments. In its bid to
counter the adverse impact of risk aversion and the retrenchment of portfolio flows (i.e., outflow
of foreign investment) from the equity market, the central bank has attempted to make Indian
government securities and corporate bonds an attractive alternative against safe heaven flights to
Federal securities. The RBI has liberalized the eligibility, holding, and liquidation criteria for
FPI investment in Indian government securities and corporate bonds through the Fully
Accessible Route (“FAR”), the Voluntary Retention Route (“VRR”), and the Medium-Term
Framework (“MTF”).

A. MEDIUM-TERM FRAMEWORK
Medium Term Framework was introduced by the central bank in 2015 to enable FPI investments
in corporate debt instruments with residual maturity of more than one year. Under the regulations
prescribed therein the residual maturity of not more than 30 per cent of investments made by
FPIs in both government securities and corporate bonds could be less than twelve months.

However, to mitigate the depletion of forex reserve and ensure adequate liquidity in the money
market, RBI has decided to allow FPI investments in corporate bonds with residual maturity of
less than one year. The relaxation will be available for investments made in the period between
8th July 2022 to 31st October 2022 and the investments will remain exempted from the limit on
short-term investments till their sale or maturity.

B. FULLY ACCESSIBLE ROUTE

Introduced in 2020, Fully Accessible Route exempts the investments made by non-resident
investors in specified government securities from the limits and regulations on FPI investments
in the Indian debt market. Under FAR, securities issued by the central government with a tenor
of five-year, ten-year, and thirty-year have been notified as “specified securities”.

However, in its bid to make Indian debt instruments an attractive alternative to the safe heaven
flights to Federal Reserve’s securities, the RBI has increased the scope of specified securities
under FAR. Issuing direction under Section 45W of Chapter IIID of the Reserve Bank of India
Act, 1934 the central bank has notified all Government Securities with a tenor of seven years and
fourteen years, as specified securities under FAR.

C. VOLUNTARY RETENTION ROUTE

The investments made by FPI under VRR are exempted from regulatory requirement otherwise
applicable to FPI investments in Indian debt market. However, unlike FAR, the exemptions
under VRR are not unconditional. The FPI must voluntarily commit to retain at least seventy five
percent of their total investment in the Indian market for a period of 3 years.

Despite the prescribed voluntarily retention, VRR offers foreign portfolio investors greater
control and a wider scope for strategic maneuvers to maximize their gain. The absence of
minimum residual maturity limit, concentration limit, and limit on sector wise investment
provides the investors with higher operational flexibility. While simultaneously furthering RBI’s
objective of maintaining adequate liquidity in the debt market and protecting the forex reserve
from sudden retrenchment. The provisions governing VRR have not been amended in the present
set of reforms.

CONCLUSION
The liberalization measures are a step towards making the Indian debt market an attractive option
for foreign portfolio investors, while simultaneously reducing the cost of borrowing and
increasing the ease of doing business for domestic businesses.

Though their success faces a significant challenge from global economic volatility, in the
backdrop of retrenchment in India’s forex reserve and a slowdown in the inflow of foreign
investments, these measures can prove to be significant mitigating instruments. An increase in
external borrowings and foreign portfolio investments in the Indian debt market can act as a
counterbalance against outflow of foreign investments from the equity market and will contribute
towards RBI’s attempts of stabilizing INR. They can be instrumental in mitigating the pressure
on deposits and checking the increasing interest rates while ensuring the availability of adequate
credit supply in the debt market.