The Reserve Bank of India (“RBI”), in consultation with the Government of India and the Securities and Exchange Board of India, vide a circular dated March 1, 2019 (“Circular”), has introduced a separate channel, called the ‘Voluntary Retention Route’ (“VRR”), to enable Foreign Portfolio Investors (“FPI”) to undertake long term investments in the debt market in India. Investment through VRR will be free of macro-prudential and other regulatory norms applicable to investments by FPIs in the debt market in India, provided the FPIs voluntarily commit to retain a required minimum percentage of their investment in India for a certain period. Some of the key features of VRR are discussed below:

(a) Eligible investors

Any FPI registered with the Securities and Exchange Board of India can participate in VRR. 

(b) Eligible instruments

• VRR-Govt: Government securities i.e., central government dated securities, treasury bills as well as state development loans.
• VRR-Corp: Instruments listed under schedule 5 (except those specified at paragraphs 1A(a) and 1A(d)) of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017.
• Repo transactions and reverse repo transactions.

(c) Other features 

• Investment through VRR shall be in addition to the general investment limit set out in RBI’s notification A.P. (DIR Series) Circular No. 22 dated April 6, 2018. Investment under this route shall be capped at INR 40,000,00,00,000 (Indian Rupees forty thousand crore) for VRR-Govt, and INR 35,000,00,00,000 (Indian Rupees thirty five thousand crore) for VRR-Corp, per annum, or such higher amount, as may be decided by RBI from time to time. The investment limit shall be released in one or more tranches.
• Allocation of investment amount to FPIs under this route shall be made on tap or through auctions.
• No FPI (including its related FPIs) shall be allotted an investment limit greater than 50% (fifty percent) of the amount offered for each allotment by tap or auction in case there is a demand for more than 100% (one hundred percent) of amount offered.
• The minimum retention period shall be 3 (three) years or as decided by RBI for each allotment by tap or auction.

(d) Management of portfolio 

• Successful allottees are required to invest 25% (twenty five percent) of their committed portfolio size within 1 (one) month and the remaining amount within 3 (three) months from the date of allotment. The retention period will commence from the date of allotment of limit. 
• Prior to the end of the committed retention period, an FPI, if it so desires, may opt to continue investments under VRR for an additional identical retention period, in which case, it shall convey this decision to its custodian.
• FPIs that wish to liquidate their investments under VRR prior to the end of the retention period may do so by selling their investments to another FPI or FPIs.

(e) Other relaxations [paragraph 7 of the annexure to the Circular]

• Investments made through VRR shall not be subject to any minimum residual maturity requirement, concentration limit or single/ group investor-wise limits which are applicable to corporate bonds.
• Income from investments through VRR may be reinvested at the discretion of the FPI and such investments will be permitted even in excess of the committed portfolio size.

Suitable amendments have been made to the relevant regulations under the Foreign Exchange Management Act, 1999, to enable the FPIs participating in the VRR scheme to hedge their interest rate and exchange rate risks in relation to their investments under VRR and to undertake repo/ reverse repo transactions to meet their liquidity requirements.

The directions issued under the Circular shall be applicable with immediate effect.