The Reserve Bank of India (RBI) introduced a scheme for Voluntary Retention Route (VRR) for investments by Foreign Portfolio Investors (FPIs) in debt markets in India on 1 March 2019. This scheme enables FPIs to invest in debt markets free of the macro-prudential norms and other regulatory norms applicable to FPI investments, provided FPIs voluntarily commit to retain a required minimum percentage of their investments in India for a specified period of time. Participation through this route is entirely voluntary. The scheme first opened for investment on 11 March 2019 and remained operational till the end of April 2019.

The key features of the VRR scheme are as follows:

• Any FPI registered with SEBI is eligible to participate under VRR. Participation is voluntary.
• The eligible instruments for investment are (i) any Government Securities (VRR-Govt) and (ii) instruments listed in Schedule 5 of FEMA 20(R) (VRR-Corp).
• Investments through this route will be in addition to the General Investment Limit (GIL) and will be capped at Rs.40,000 crore for VRR-Govt and Rs.35,000 crore for VRR- Corp per annum, or such higher amount, as may be decided by the RBI, to 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 shall be allotted an investment limit greater than 50% of the amount offered for each allotment by tap or auction in case there is a demand for more than 100% of amount offered.
• The minimum period of retention shall be three years or as decided by the RBI for each allotment by tap or auction.
• The FPI shall invest the Committed Portfolio Size (CPS) and remain invested at all times during the voluntary retention period subject to the minimum investment shall be 75% of the CPS, including the cash holdings in the Rupee accounts used for this route.
• A minimum of 25% of the CPS is to be invested within one month and the remaining amount within three months from the date of allotment. The retention period will commence from the date of allotment of limit.
• FPI may continue investments under this route for an additional identical retention period by conveying its decision to its custodian before the committed retention period ends.
• In case an FPI decides not wish to continue under VRR at the end of the retention period, it may liquidate its portfolio and exit or it may shift its investments to the GIL, subject to availability of limit thereunder.
• FPIs that wish to liquidate their investments prior to the end of the retention period may do so, by selling their investments to another FPI (s), who shall abide by the terms and conditions applicable to the selling FPI.
• Any violation of the terms of this scheme will be subjected to regulatory action by SEBI. Minor violations, as determined by the custodian of the FPI, can be regularized within 5 working days. Details of all non-minor violations and minor violations which have not been regularized shall be reported to SEBI by the custodian.
• Investments made through this route will not be subject to minimum residual maturity requirement, concentration limit or single/group investor-wise limits applicable to corporate bonds. Income from such investments may be reinvested at the discretion of the FPI, even in excess of the CPS.
• FPIs will be eligible to participate in repos for their cash management, provided the amount borrowed or lent does not exceed 10% of their investment. They are also eligible to participate in any currency or interest rate derivative instrument, OTC to manage their interest or currency risk.

The VRR scheme posed certain practical challenges inter alia in relation to its implementation, which were brought to the RBI’s notice by industry participants. RBI addressed such feedback and made necessary revisions in the directions vide its Circular dated 24 May 2019 as follows:

• Introduction of a separate category of investment, called VRR–Combined, which allows investment in both government securities and corporate debt. The investment limit in this category is ₹ 54,606.55 crores ;
• Investment limits shall be available ‘on tap’ and allotted on ‘first come, first served’ basis. The ‘tap’ shall be kept open till the limit is fully allotted or till December 31, 2019, whichever is earlier ;
• FPIs that were allotted investment limits ‘on tap’ during March 11 2019 to April 30 2019 may, at their discretion, convert their full allotment to VRR-Combined by advising Clearing Corporation of India Ltd (CCIL) through their custodians. Such conversions shall not use up the investment limit of ₹ 54,606.55 crores indicated in para (i) above ;
• The minimum retention period shall be three years. During this period, FPIs shall maintain a minimum of 75% of the allocated amount in India ;
• At the end of the retention period, FPIs have an additional option, to continue to hold their investment until the date of maturity or the date of sale, whichever is earlier ;
• FPIs may apply for investment limits online to CCIL through their respective custodians ;
• The requirement to invest at least 25% of the Committed Portfolio Size within one month of allotment has been removed.

The revised VRR scheme opened for allotment on 27 May 2019.