Tag Archives: FPI

RBI opens Rupee Interest Rate Derivatives market to Non-Residents for hedging and trading in India

The Reserve Bank of India (“RBI”) on 27 March 2019, announced that a Non-Resident[1] shall be given access to the Rupee Interest Rate Derivative (“IRD”) market in India vide the notification of Non-resident Participation in Rupee Interest Rate Derivatives Market (Reserve Bank) Directions, 2019 (the “Directions”) with immediate effect which applies to Rupee IRD transactions undertaken on recognized stock exchanges, electronic trading platforms (“ETP”) and Over the Counter (“OTC”) markets.

Permissible activities under the Directions:

Under the Directions, a Non-Resident can undertake transactions in Rupee IRD markets for the following purposes:

1.Hedging their exposure to interest rate risk by using any permitted IRD product transacted on recognized stock exchanges, ETPs or OTC market, subject to the following condition

  • IRD transaction must conform to the provisions of Section 45(V) of the RBI Act, 1934 and FEMA, 1999, and any rules, regulations and directions issued thereunder;
  • Market-makers must ensure that the transactions by Non-Resident are being carried out for the purpose of hedging by calling for any relevant information from the Non-Resident, who will be obliged to provide the same

2. For purposes other than hedging of interest rate risk, i.e. Trading by;

  • Non-Residents other than individuals, for undertaking Overnight Indexed Swaps (“OIS”) transactions subject to condition of conducting it only through a market-maker in India by way of a back-to-back arrangement through a foreign counterpart of the market-maker in a back-to-back arrangement meaning that the Non-Resident shall undertake the transaction with a foreign counterpart of the market-maker and the foreign counterpart, in turn, immediately shall enter into an off-setting transaction with the market-maker in India. All rupee interest rate derivatives transactions, globally, of related entities of the market-maker must also be accounted for in the books of the market-maker.

OIS transactions by NRs for purposes other than hedging interest rate risk shall be subject to the overall limit as well. This shall be in the form of a Price Value of a Basis Point (“PVBP”) of all outstanding OIS positions undertaken by all Non-Residents which shall not exceed INR 3.50 billion. The PVBP of all outstanding OIS positions for any single Non-Resident shall not exceed 10% of the overall PVBP cap. The Clearing Corporation of India Ltd. (“CCIL”) shall publish methodology for calculation of PVBP, monitor and publish utilization of PVBP limit on a daily basis.

  • Foreign Portfolio Investors (“FPI”) collectively may also transact Interest Rate Future (”IRF”) up to INR 50 billion in terms of RBI’s circular titled “Separate limit of IRFs for FPIs” dated 01 March 2018.

Payments and Reporting:

All payments related to IRD transactions of a Non-Resident may be routed through a Rupee account or a vostro account. Market-makes shall also ensure that Non-Resident clients are from an FATF compliant country and that the clients comply with KYC requirements as prescribed under the RBI’s KYC Master Direction as amended from time to time. It is to be noted that this may required Non-Resident to acquire a Permanent Account Number (PAN) to quote in IRD transaction instruments.

All OTC rupee IRD transactions are to be reported by market-makers and ETPs to the trade repository of CCIL, clearly indicating whether trade is for hedging or other purposes. Trade details, including particulars of NR client for OIS transactions under the back-to-back arrangement is to be reported by market-makers to the trade repository of CCIL. Additionally, cross-border remittances arising out of transactions in Rupee IRD shall be reported by banks to RBI at monthly interval.


[1] A ‘Non-Resident’ under the Directions means person resident outside India as defined in section 2(w) of Foreign Exchange Management Act, 1999.

2. https://www.rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=11512

Relaxations to FPIs and Companies under bankruptcy wrt ECB

Regulatory update: RBI’s Bi-Monthly Monetary Policy Statement grants important relaxations to FPIs and Companies under bankruptcy with respect to ECB

The Reserve Bank of India (RBI) on 7 February 2019 has issued its Sixth Bi-monthly Monetary Policy Statement (Monetary Policy Statement), for the current fiscal year 2018-19. The key relaxations announced for foreign investors are as follows:

  1. Relaxation to FPIs investing under the debt route:

Under the extant framework for FPI investment in corporate debt, the RBI’s A.P. (DIR Series) Circular No. 31 dated June 15, 2018 restricted an FPI from having more than 20% exposure of its total corporate bond portfolio, in the corporate debt market in a single corporate (including exposure to entities related to the corporate). Imposed with the aim of incentivizing FPIs to maintain a diverse portfolio of assets, existing FPIs were also given an exemption from this requirement till end of March 2019 to adjust their portfolios. However, the market feedback according to the RBI indicated that FPIs have been constrained by the earlier requirements, and relaxations were needed.

Accordingly, in order to encourage investment in the Indian corporate debt market, the RBI vide the Monetary Policy Statement, removed the abovementioned restriction and has declared that all FPIs shall henceforth again be permitted to invest any portion of its corporate bond portfolio in a single borrower entity. The Monetary Policy Statement indicates that RBI would issue a circular in this regard by mid-February 2019 to make it official.

The Monetary Policy Statement however did not provide any relaxation on the following key restrictions imposed vide the aforementioned A.P. (DIR Series) Circular No. 31 dated June 15, 2018:

  1. Investment by a single FPI or a group of related FPIs shall not exceed 50% of the issue size of a corporate bond; and
  2. At any point of time, a FPI’s investments in corporate / government bonds maturing within one year shall not exceed 20% of the FPI’s total portfolio in corporate / government bonds.
  1. Relaxation ECB framework norms on end-use restrictions for companies under bankruptcy:

Under the extant External Commercial Borrowing (ECB) framework, any borrowing proceeds from an ECB could not be utilized for repayment or for on-lending for repayment of domestic rupee loans. However, cognizant of the prospect that resolution applicants under Corporate Insolvency Resolution Process (CIRP) under Insolvency and Bankruptcy Code (IBC), 2016 might find it attractive to borrow abroad to repay the existing lenders, the RBI has decided to relax the end-use restrictions for resolution applicants under the CIRP.

Further under A.P. (DIR Series) Circular No. 18 also dated 7 February 2019 the resolution applicants, who are otherwise eligible borrowers, have been allowed to raise ECBs from recognised lenders, except the branches/ overseas subsidiaries of Indian banks, for repayment of Rupee term loans of the target company under the approval route.


  1. Sixth Bi-monthly Monetary Policy Statement for the current fiscal year 2018-19: https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=46237
  2. P. (DIR Series) Circular No. 18 date February 07, 2019: https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=11472&Mode=0

Mauritius: A Prime Financial Center for FPI Investments in India

 A. SEBI Circular Letter Dated 10 April 2018

On 10 April 2018, the SEBI, issued a circular titled ‘Know Your Client Requirements for Foreign Portfolio Investors (FPIs)’ clarifying its position on the concept of identification and verification of Beneficial Owner of an FPI (BO). The Circular fell as a death knell to NRIs (Non-Resident Indians), PIOs (Persons of Indian Origin) and OCIs (Overseas Citizens of India) who are BOs of FPIs by imposing a blanket restriction on the eligibility of such category of persons to make investments as FPIs. In essence, the Circular retains the concept of controlling ownership interest and control basis for identification of BOs. Hence, in case of a company, the BO is identified as per the materiality threshold of 25%, and in case of other entities such as a partnership firm or trust, the threshold stands at 15%. As for “high-risk jurisdictions,” a lowered materiality threshold of 10% is applicable.

It is now expected that SEBI will review its position on the BO construct by excluding PIOs and OCIs from the Beneficial Ownership restrictions imposed by the April Circular. However, no official confirmation to that effect has been obtained yet. In any event, while the intent of the Circular is to curb the evils of money laundering and round-tripping of funds, NRIs who currently hold significant interest in Indian equities and coming in as FPIs or through offshore funds, may get affected as from 10 October 2018 which is the deadline for existing FPI structures to rejig their operations and comply with the new requirements.

B. Mauritius not a High-Risk Jurisdiction

According to certain media reports, SEBI had requested custodian banks to prepare a list of such high-risk jurisdiction and among the names submitted were China, Cyprus, UAE and more significantly Mauritius. However, pursuant to a high-level discussion between the Mauritius Financial Service Commission and SEBI, it was subsequently confirmed that SEBI is neither working on nor contemplating to produce any list at its level, which will identify Mauritius as a High-Risk jurisdiction. At this meeting, the FSC received the comfort that SEBI acknowledges all initiatives undertaken by Mauritius to ensure full adherence to best international norms and practices with respect to regulatory oversight and enforcement. (vide https://www.fscmauritius.org/media/54904/fsc-issues-communique-high-level-discussions-between-the-financial-services-commission-fsc-and-the-securities-and-exchange-board-of-india-sebi.pdf).

C. Mauritius, still attractive for FPI?

The Mauritian legislations caters for structures which allow domestic funds to invest into another fund established in another jurisdiction. The core traits of such type of structures are to invest in a portfolio that contains different underlying assets instead of investing directly in bonds, stocks and other types of securities.

The prevailing Acts and Regulations contain provisions for the structuring of Fund of Funds where the concept relates to a feeder fund whose main role is to pool funding from worldwide investors and then inject the capital amount into a master-feeder fund domiciled outside Mauritius, for instance, an Alternative Investment Fund (Category 1) established in India. Under such equation, the AIF will be subject to Indian regulations and will ventilate the money received from the Feeder Fund in Mauritius into short-term and/or long-term investments.

The Mauritian framework and regulations also offer the possibility to incorporate a multiclass Fund. Such Fund is well reputed to invest under the FPI route and meet the definition of a broad-based fund under the SEBI regulations. The regulations in Mauritius are flexible enough to formally register a Fund with multiple sub-fund where segregation of assets and liabilities can be done under the creation of sub fund for each type of investors and underlying investments. Provided that some conditions are met, this Fund can apply for FPI license and engaged in investment activities in quoted securities and/or private equity investments.

Investments in securities:

Quoted investments made through the FPI route in India are now subject to tax following the Treaty re-negotiation. It is to be noted that income from the sale of shares is characterized as capital gains and at present, FPIs enjoy the benefits of the capital gains provisions under the India-Mauritius DTAA.  While there is a zero percent rate applicable on gains arising out of shares that are listed and sold on a recognized stock exchange if such shares are held for more than 12 months, capital gains arising out of investments are subject to a tax rate of 15% (exclusive of applicable surcharge and cess) if such shares are held for less than 12 months i.e. short-term capital gains. During the Transition Period (1 April 2017 – 31 March 2019), and subject to the satisfaction of the limitation of benefits clause, this rate may be reduced to 7.5%. Hence, while short-term capital gains have been affected by the treaty re-negotiation, long-term investments in shares of listed Indian Companies are not affected by the DTAA amendment and continue to enjoy the treaty benefits. The above should be read in light of recent legislative changes brought to the (Indian) Income Tax Act which extends the scope of capital gains taxation to gains on the transfer of a long-term capital asset with effect from 1 April 2018. While the amendments to the taxation of LTCG would not affect transfers made on or before 31 March 2018, the impact on securities acquired on or after 1 April 2017 and transferred on or after 1 April 2018 would be taxable at the maximum marginal rate of 10.92% of gains arising from the transfer of these securities. In the latter case, gains arising from sale or transfer of long-term equity shares shall be taxable at the rate of the 50% of the prevailing domestic (Indian) tax rate under the DTAA, that is, 5.82% plus applicable charge and cess for shares acquired after 1 April 2017 and sold before 31 March 2019. As for shares sold post 31st March 2019, the full domestic rate will apply.

In a nutshell, it is posited that the modification on capital gains taxation is limited to gains arising on sale of shares. This ensures continuity of benefit to other instruments and also provides much-needed certainty in respect of the position of the India-Mauritius DTAA. Mauritius still retains its attractiveness as far as channeling of foreign portfolio investments is concerned, the more so that other alternative structures are being constantly explored so as to offer wider options to investors.

Debt Investment:

Mauritius accounts for the highest level (about 16%) of total foreign portfolio inflows in India after the US. It is considered as an inexpensive and a favourite route for many NRI and PIO investment managers. Furthermore, it is not gainsaid that following the re-negotiation of the India-Mauritius DTAA in 2016, Mauritius still remains a competitive jurisdiction for making debt investments through the FPI route in listed securities either on the primary or secondary markets in India.

Essentially, a foreign investor investing in debt instruments could earn the following incomes from investments in India: either (a) gains arising from sale / transfer of securities held in Indian companies or (b) interest income.

It has been clarified that any gains arising to an FPI from the sale of securities (equity or debt) held in Indian companies will be characterized as ‘capital gains.’ Under the India-Mauritius DTAA, if the gain from the alienation of debt instruments (compulsorily, optionally and non-con­vertible debentures), other than redemption premium, is treated as ‘capital gains’, such instruments shall only be tax­able in Mauritius, which is beneficial as Mauritius does not levy a tax on capital gains.

As for interest income, the Protocol provides that all Mauritius entities including banks earning interest income from Indian sources will now be required to pay tax at a rate of not more than 7.5% of the gross amount of interest provided that the Mauritius entities are the beneficial owners of such interest income.  Furthermore, in case the domestic (Indian) tax rate is lower than 7.5%, then it is the domestic rate which will be applicable. Based on the above analysis, it can be said that for now, Mauritius is certainly the preferred route for investing in the debt market in India and now emerges as the preferred jurisdiction for debt investments consider­ing the lower withholding tax rates for interest income as well as the capital gains tax exemption, as compared to such other jurisdictions as Singapore (15%) and Netherlands (10%).

D. Benefits of Using Mauritius

Mauritius has built a solid reputation of being a jurisdiction of substance internationally. Supported by its legislative framework and financial services infrastructure, Mauritius offers an ideal platform for investments around the globe with a focus on Africa and Asia including India.

While the current fiscal advantages will play a major role in the choice of jurisdiction for a cross-border investment, they are not the only factors which should be taken into account. Mauritius is considered as one of the most reputable offshore financial centers in the world, for a number of reasons including:

  1. well established administrative infrastructure for setting up and operating special purpose vehicles;
  2. a well-established rule of law founded on the Common and civil law;
  3. its modern and flexible company legislation which is based on the Anglo- Saxon laws;
  4. compliance with anti-money laundering laws and international standards;
  5. Mauritius has never been blacklisted internationally by any of the OECD, FATF or UN;
  6. the long-term commitment and support of the Mauritius government in the development of the financial services sector;
  7. its political stability and a free market economy;
  8. several Investment Protection and Promotion Agreements which have been signed in order to safeguard investors business and assets;
  9. the relatively low cost of services compared to other jurisdiction;
  10. Unlike such offshore jurisdictions like Singapore which does not have any specific corporate structures that are geared towards investment funds, Mauritius has a variety of corporate structures which can be used to channel foreign portfolio investments, including for example Expert Fund or Professional CIS regulated by the Financial Services Commission;
  11. an educated and bilingual workforce;
  12. good international telecommunications services;
  13. Presence of the Mauritius FSC Representative Office in Mumbai as a key point of contact for SEBI; and
  14. a convenient time zone location which allows for the conduct of business in the Far East in the morning, Europe during the early afternoon and the United States, later in the day

E. What Next?

Mauritius has been undoubtedly a vibrant International Financial Centre during the last 25 years. Its strategic location, its stable socio-political environment, its business-conducive framework, it’s well-established and yet competitive regulatory framework, and its connectivity and openness to the rest of the word makes Mauritius an attractive hub for financial services and capital raising, linking Asia/Europe/USA to Africa. With more challenges ahead and investors seeking for long-term visibility, new legislative changes have been brought by the Finance (Miscelleneous Provisions) Act 2018 to the global business sector in order to bring more certainty, clarity and harmonisation to the treatment of foreign investors and cross-border investments alike. Mauritius is now gearing itself towards becoming a leader in the African region and beyond. Policy makers are presently in the process of elaborating a 10 year ‘Blueprint’ for the Financial Services sector, which will make significant in-roads into existing and new activities which Mauritius has to offer from its jurisdiction.

This Article is authored by our Mauritius partner Anex Management Services Limited, licensed by Mauritius Financial Services Commission and having more than 20 years of experience in providing incorporation, accounting, compliance and administration services to global business entities in Mauritius.