Sebi plans regulatory breather for FPIs investing in sovereign bonds

The market regulator plans to ease rules for foreign portfolio investors (FPIs) that invest only in Indian government bonds as it seeks to draw more inflows after India’s inclusion in global bond indices.

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The Securities and Exchange Board of India (Sebi) has proposed easier registration and compliance for such FPIs, according to a consultation paper released on Tuesday.

The move is aimed at improving the ease of doing business and attracting more stable, long-term capital into sovereign debt. India has been included JPMorgan Global Bond Index and Bloomberg Emerging Market Bond Index, and will be added to FTSE Russell Emerging Markets Government this year. That's expected to drive billions of dollars in passive flows into government securities.

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FPI investment in bonds eligible under the fully accessible route (FAR) crossed ₹3 trillion as of March 2025, a nearly 10-fold jump from 2021 levels, Sebi highlighted.

The Reserve Bank of India (RBI) has kept the general limit for foreign investment in government bonds at ₹2.79 trillion for April–September and ₹2.89 trillion for October–March. This suggests that FAR investments have already exceeded 100% of the general limit for the first half of FY26.

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To further ease such investments, Sebi decided to simplify the registration and compliance process for investors focusing solely on government bonds through voluntary retention route (VRR) and FAR. 

VRR allows only FPIs to invest in government and corporate bonds with a minimum three-year lock-in and certain regulatory relaxations, while FAR permits all non-resident investors to invest in specified government securities without any investment limits or lock-in requirements.

For FPIs only investing in government bonds (IGB-FPIs), many of the Sebi FPI regulations, including equity investment limits and additional disclosure requirements, don’t apply to them.

Greater freedom

Sebi’s move to ease rules follows the RBI’s 8 May decision to allow foreign investors greater freedom to buy Indian corporate bonds, giving them a chance to purchase more short-term debt.

In its consultation paper, Sebi proposed to align KYC norms for FPIs only investing in government bonds with RBI rules, requiring compliance every 2, 8, or 10 years, depending on the risk profile, instead of the current one- or three-year cycle.

Since such FPIs can only invest in sovereign bonds, the market regulator has proposed exempting them from disclosing investor group linkages, which are used to monitor investment concentration limits in equity and corporate debt.

Currently, non-resident Indians (NRIs), overseas citizens of India (OCIs) and resident individuals cannot contribute more than 25% individually or 50% collectively to the corpus of an FPI, and they are not allowed to control it.

Sebi has now proposed scrapping this restriction, which would align with the FAR route, where NRIs and OCIs can already invest in government bonds without limits. However, resident individuals must still invest through the Liberalised Remittance Scheme (LRS) and in global funds with less than 50% Indian exposure.

Government bonds-focused FPIs would get a uniform 30-day window to disclose any material changes in their structure or key information compared with the seven- or 30-day timelines applicable today.

Sebi has also proposed a mechanism for regular FPIs to convert into IGB-FPIs (and vice versa) with appropriate declarations and after divesting from non-government bond holdings.

The regulator has invited public comments on the paper until 3 June.