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This article is written by Bhawana keshwani, here she discusses voluntary retention route for Foreign Portfolio Investor.


In March 2019, the Reserve Bank of India (RBI) along with the Government of India and the Securities and Exchange Board of India (SEBI) introduced a new window called “Voluntary Retention Route” to encourage Foreign Portfolio Investors (FPI) to lock their investments in India for a considerate period.[1] This route is introduced in an attempt to boost foreign investment in the Indian debt market by such investors.

What is a foreign portfolio Investment?

It is an investment made by non-residents in Indian Securities which can be effortlessly purchased and sold out subject to the terms and conditions laid down by the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI). Such securities have been specified in Schedule 5 of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017 notified vide Notification No. FEMA.20(R)/2017-RB dated November 07, 2017 like non-convertible debentures/bonds, domestic mutual funds, treasury bills, commercial papers, etc.

Features of foreign portfolio investment

  1. Such investments have reduced risks and greater liquidity than a Foreign Direct Investment, but they are also guided by specific events or trends in the country.
  2. Such investments depend on a variety of factors and conditions that may hamper the prospect of higher returns for investors like political issues, cross border rivalries, economic growth or drifts in currency rates, etc.
  3. They are highly volatile and lack consistency because they are event specific.


This scheme was earlier proposed in October 2018 by the RBI through a discussion paper[3] and post the representations/suggestions from market participants, it released a circular[4] that notified the FPIs regarding the Voluntary Retention Route provided to them, to voluntarily invest in both Government Securities like treasury bills and state development funds as well as Corporate Debt Instruments (specified in Schedule 5 of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India Regulations, 2017; excluding units of domestic mutual funds and dated government securities) subject to the condition that the investment must be locked in India for a minimum period of three years.

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Key features of the Scheme

Easy flow of foreign funds

The circular notifies that investment through the VRR route shall be free of any regulatory approvals applicable to investments normally made by the Foreign Portfolio Investors in India in the debt market. This implies that there shall be more freedom than regular foreign debt investors if such a route is followed.

Also, the “Minimum Residual Maturity Requirements” which are currently applicable on the Corporate Bonds in India (as specified in paragraphs 4(b), (e) and (f) respectively of A.P. (DIR Series) Circular No. 31 dated June 15, 2018)[5]  shall also not be applicable on the investments made through the VRR provided the FPI maintains a minimum of 75 percent investment for three years in India.

(For the Government Bonds, RBI had earlier in 2018 removed such restrictions on central government securities and state development loan categories subject to the condition that the total investment made by an FPI in any category shall not exceed 20 percent in case these securities have a residual maturity of less than a year.

Investment Limit

The cap set for investment through the Voluntary Retention Route is fixed at Rs. 40,000 Crore for Government Debt and Rs. 35,000 Crore for Corporate Debt per annum. An amount higher to this can be invested only with the prior approval of the RBI and the allocation i.e. the “Committed Portfolio Size” or CPS of each investor shall be done by the Clearing Corporation of India Limited (CCIL) on “first come first served” basis.

Auction process for bids

The RBI has again introduced an auction process to allow the FPIs to invest in India in a fair manner. Through the auction, the FPIs have been allowed to place their bids regarding their total investment and the retention period proposed by them in each category of securities. The allocation shall be made to them on the basis of the retention period specified by them i.e. the investor with the highest retention period shall be allocated the CPS first.

Minimum limit of Investment

After the allocation is made, the investors are required to invest a minimum of 25 percent of their CPS in the first month of allotment and at least 75 percent of their CPS in the total retention period. Such amount shall be determined on the face value of the securities. The return of money to the cash accounts of such FPIs shall not be allowed if such withdrawal leads to a decline of more than 75 percent of CPS during their retention period.

Limiting risk associated with such Investment – Hedging of Exchange Rate By The RBI

It has already been discussed how volatile investments through FPIs are because of them being event specific. Therefore, the RBI, on March 2019 released another circular[6] to reduce the risk of losses that might be caused to the investors due to a change in the exchange rate and associated risks. Through the circular, RBI has now allowed authorized dealers to offer derivative contracts to participants under the VRR and the products available for hedging purposes are forwards, options, cost reduction structures and currency swaps with rupees and one of the currencies.  FPIs are also allowed to freely cancel and rebook the derivative contracts.

Accordingly, there were Amendments made in the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 where a clause was added:

“(5)(a) A Foreign Portfolio Investor or a Non-Resident Indian (NRI) or an Overseas Citizen of India (OCI) may trade or invest in all exchange traded derivative contracts approved by Securities and Exchange Board of India from time to time subject to the limits prescribed by Securities and Exchange Board of India and conditions specified in Schedule 5”


The RBI bank of India has taken a lot of measures to extenuate the liquidity concerns from the Indian Debt Market. Earlier, in January 2019, it revised the “External Commercial Borrowings” or the ECB norms to open the funding doors in India. Through the VRR scheme too, it shall be possible to allow funds to be invested in the defaulted assets of India, which shall help the banks to alleviate their concerns over the non performing assets.

RBI has also looked into some operational aspects of funding through this route to avoid any difficulty in the future. It requires the FPIs to open one or more separate Special Non-Resident Rupee (SNRR) account for investment through the Route. All fund flows relating to investment through the Route shall reflect in such account(s)

[1]RBI introduces the Voluntary Retention Route for Investments by Foreign Portfolio Investors (FPIs) – Voluntary Retention Route, available  at


[3] RBI releases Discussion Paper on ‘Voluntary Retention Route’ (VRR) for investment by FPIs, available at

[4] Voluntary Retention Route’ (VRR) for Foreign Portfolio Investors (FPIs) investment in debt, available at

[5] Investment by Foreign Portfolio Investors (FPI) in Debt – Review, available at

[6] Hedging of exchange rate risk by Foreign Portfolio Investors (FPIs) under Voluntary Retention Route, available at

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