Lawyer Monthly Magazine - July 2019 Edition

On 25 April 2019, the Reserve Bank of India (“RBI”) issued a circular permitting foreign portfolio investors (“FPI”) to invest in municipal bonds with a view to broaden access of non–resident investors to debt instruments in India. As per the circular, FPI investment in municipal bonds 1 shall be reckoned within the limits set for FPI investment in State Development Loans (SDLs) 2 . Further, the investment in municipal bonds will be treated as debt market investments and will be subject to the existing conditions for investments by FPIs in the debt market, which, inter-alia, include the following: (a) FPIs being permitted to invest in Central Government securities (G-secs), including in Treasury Bills, and State Development Loans (SDLs) without any minimum residual maturity requirement, subject to the condition that short-term investments by an FPI under either category shall not exceed 20% of the total investment of that FPI in that category. (b) FPIs being permitted to invest in corporate bonds with minimum residual maturity of above one year, subject to the condition that short-term investments in corporate bonds by an FPI shall not exceed 20% of the total investment of that FPI in corporate bonds. These stipulations would not apply to investments in Security Receipts (issued by Asset Reconstruction Companies) by FPIs. (c) The cap on aggregate FPI investments in any Central Government security is at 30% of the outstanding stock of that security. Pursuant to the RBI circular permitting FPIs to invest in municipal bonds, the Securities and Exchange Board of India (“SEBI”) issued a circular dated 9 May 2019, in accordance with the provisions of Regulation 21 (1) (p) of SEBI (Foreign Portfolio Investors) Regulations, 2014. Regulation 21 (1) of SEBI (Foreign Portfolio Investors) Regulations, 2014 provides a list of securities in which a foreign portfolio investor can invest. Since the list did not include municipal bonds, the circular was issued so as to include municipal bonds within the permitted securities. Framework for Innovation Sandbox On 20 May 2019, SEBI issued a cir- cular outlining the concept of in- novation sandbox. SEBI believes that encouraging adoption and usage of financial technology (“FinTech”) would have a pro- found impact on the develop- ment of the securities market. FinTech can act as a catalyst to further develop and maintain an efficient, fair and transpar- ent securities market ecosystem and create an ecosystem which promotes innovation in the se- curities market. SEBI believes that FinTech companies should have access to market-related data, particularly, trading and holding data, which is otherwise not readily available to them, to enable them to test their innova- tions effectively before the intro- duction of such innovations in a live environment. With a view to operationalizing the above- mentioned endeavor, SEBI is proposing an “Innovation Sand- box”, which would be a testing environment where FinTech firms and entities not regulated by SEBI (herein afterwards referred to as participants/applicants) may use the environment for 26 Special Feature JUL 2019 www. lawyer-monthly .com Regulatory Updates of the Month: India Investment by Foreign Portfolio Investors (FPI) in Debt