QFIs allowed to invest additional $1-bn in debt schemes sans lock-in norms

Qualified Foreign Investors (QFIs) can invest up to $1 billion in corporate debt securities and mutual fund debt schemes without any lock-in or residual maturity clause. This limit will be over and above the limit of $20 billion for FII investment in corporate debt, the Securities and Exchange Board of India (SEBI) said in a circular today.

QFIs were allowed to invest in schemes of Indian mutual funds and equity shares subject to terms and conditions mentioned therein by opening a demat account with a qualified depository participant (DP). 

It has now been decided in consultation with the Government of India and the Reserve Bank of India (RBI) to allow QFIs to invest in Indian corporate debt securities and debt schemes of Indian mutual funds, SEBI said, adding that these will be monitored and allocated by the depositories.

The QFI transactions will also be limited to the following debt securities:

  • Purchase and sale of corporate debt securities listed on recognised stock
    exchange(s);
  • Purchase of corporate debt securities through public issues, provided the listing on
    recognised stock exchange is committed to be done as per the extant provisions of the Companies Act, 1956;
  • Sale of corporate debt securities by way of buyback or redemption by the issuer; and
  • Purchase and sale of units of debt schemes of Indian mutual funds.

The provisions relating to FIIs in case of non-listing of ''to be listed'' corporate bonds within 15 days will be applicable to QFIs as well, SEBI said in its circular.

Limits for investment in corporate debt

QFIs can invest in corporate debt securities (without any lock-in or residual maturity clause) and mutual fund debt schemes subject to an overall ceiling of $1 billion. This limit will be over and above the limit of $20 billion for FII investment in corporate debt and will be monitored and allocated accordingly.

QFI can invest without obtaining prior approval until the aggregate QFI investments reaches 90 per cent of $1 billion, ie, $0.9 billion. The depositories will administer and monitor the investments so as to ensure that aggregate investment of all QFIs will not be more than 90 per cent of the investment limit.

Monitoring and allocation of investment limits will be broadly in terms of SEBI regulations. The depositories will jointly publish/ disseminate the aggregate investment of QFIs to public, on a daily basis.

When the aggregate investments of all the QFIs reaches 90 per cent of the investment limit, notice informing the same will be published by the depositories on their web sites and no fresh purchases will be allowed without prior approval of the depositories. The depositories will also inform the DPs and recognised national stock exchanges whenever such aggregate investments of all the QFIs fall below or above 90 per cent of the investment limits.

For fresh purchases after the investment limit reaches 90 per cent QFIs will have to obtain prior approval of the depositories. The QFI will make such request for prior approval to the concerned depository through the DP specifying therein the name of the QFI, PAN and other unique identification numbers relating to that QFI, by way of any mode of communication as specified by the depositories in consultation with each other. The concerned depository will provide the details of prior approval requests received by it to the other depository.

After market hours, the depository will give approval to request for purchase on a first-come-first-served basis in co-ordination with the other depository, based on time of receipt of the prior approval requests by the depositories. The validity of the approval will be for the next trading day only.

In case the aggregate shareholding of the QFI exceeds overall investment limit, the depositories should jointly notify the respective DPs regarding the breach along with the names of the QFI due to whom the limits have been breached.

For this purpose, the stock exchanges should provide the required information so as to enable the depositories to identify the transaction details of the QFI, including the name of QFI, PAN and/or other unique identification number relating to that QFI, purchase quantity and time or any other information as may be required by the depositories.

In case the aggregate shareholding of the QFI exceeds overall investment limit for whatsoever reason, the QFI due to whom the limit is breached should mandatorily divest excess holdings within three working days of such breach being notified by depositories to the DP. The DP should obtain necessary authorisation from the QFI at the time of account opening for such divestment of excess holdings.

DPs should ensure Know Your Customer (KYC) of the QFIs as per the norms prescribed by SEBI. AD category banks will also have to ensure KYC of the QFIs for opening and maintenance of the single non-interest bearing rupee accounts as per the extant norms prescribed by the RBI.

All the other stipulations prescribed by SEBI regarding QFI investment in equity will apply mutatis mutandis.

The DPs should, in addition to the reporting to RBI, should also ensure reporting to SEBI in a manner and format as prescribed by SEBI from time to time.