Money & Banking

Sops for FPI investment in defaulted bonds to boost liquidity

Suresh P Iyengar Mumbai | Updated on February 05, 2021

Market experts also attribute the spike in FPI inflows to the recent spate of fundraising by Indian corporates

In order to further boost foreign portfolio investments in the corporate bond segment, the RBI has proposed to exempt FPI investment in defaulted corporate bonds from the short-term limit and the minimum residual maturity requirement under the Medium Term Framework.

Detailed guidelines are being issued separately, said the RBI. At present, foreign portfolio investors can invest in security receipts and debt instruments issued by Asset Reconstruction Companies and debt instruments issued by an entity under the Corporate Insolvency Resolution Process, as per the resolution plan approved by the National Company Law Tribunal under the Insolvency and Bankruptcy Code, 2016, and these investments are exempted from the short-term limit and minimum residual maturity requirement under the Medium Term Framework for investment by FPIs in corporate bonds.

Vidisha Krishan, Partner, MV Kini & Co, said the bonds issued under a resolution plan have an issuer whose debt and restructuring has been resolved and is ideally under a fresh management free from its earlier baggage. To enable FPI investment in defaulted bonds, Krishan said the full disclosure on underlying nature of the issuer and on the rating and other adverse factors needs to be disclosed.

Niranjan Hiranandani, Managing Director, Hiranandani Group, said exemption to FPI investment in defaulted corporate bonds to boost further investment in recaptured economic revival and firming up consumer protection.

The new policy’s paramount objective of economic revival were addressed by innovative measures such as enhancing liquidity by allowing NBFC to tap TLTRO under on tap scheme and allowing additional credit for small MSME borrower’s up to ₹25 lakh, he added.

Sandeep Agarwal, Senior Fund Manager, Sundaram Mutual, said encouraging foreign stressed assets funds to buy defaulted bonds would mean more buyers in this segment and better liquidity in defaulted bonds.

This would help market participants such as mutual funds and insurance to find exit from defaulted bonds at better prices, he added.

In March, the RBI hiked the FPI investment limit in corporate bonds to 15 per cent of outstanding stock for FY21.

At present, FPIs can invest ₹3.17-lakh crore in Indian corporate bonds. With the enhanced limit, they can hold ₹4.29-lakh crore of corporate bonds for the half-year ended September 2020 and ₹5.41-lakh crore for the half-year ending March 2021.

Published on February 05, 2021

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