The Reserve Bank of India, on 8 May 2025, issued a circular titled "Investments by Foreign Portfolio Investors in Corporate Debt Securities through the General Route — Relaxations," withdrawing the short-term investment limits and concentration limits previously applicable to FPI investments in corporate debt. The circular significantly liberalises the framework governing foreign portfolio investment in India's corporate bond market.
Background
Under the previous regulatory regime, foreign portfolio investors were subject to two key restrictions when investing in corporate debt securities through the general route. First, a short-term investment limit capped the proportion of an FPI's total corporate debt investment in instruments with a residual maturity of up to one year at 30 per cent. Second, concentration limits restricted investments by an FPI — together with its related persons — to 15 per cent of their maximum investment limit for long-term FPIs, and 10 per cent for other FPIs.
These restrictions were originally introduced to discourage speculative short-duration flows and to reduce concentration risk in the corporate bond segment. However, market participants and industry bodies had represented that these limits were constraining the depth and liquidity of India's corporate bond market and were deterring FPI participation relative to competing Asian markets.
Key Provisions
The RBI circular introduces the following relaxations:
Withdrawal of short-term investment limit: The 30 per cent cap on FPI investment in corporate bonds with residual maturity of up to one year has been removed. FPIs may now invest in corporate bonds of any maturity without being constrained by end-of-day short-term exposure limits.
Removal of concentration limits: The concentration limits of 15 per cent (long-term FPIs) and 10 per cent (other FPIs) in respect of their maximum investment limit in corporate debt securities have been withdrawn.
Remaining restrictions: The circular clarifies that issue-wise limits and minimum residual maturity requirements for FPI investments in corporate bonds continue to apply. These safeguards ensure that individual corporate issuances do not become disproportionately held by foreign investors.
Implications for Practitioners
The removal of short-term and concentration limits marks a notable liberalisation of India's capital account framework for corporate debt. Capital market advisors and fund managers managing FPI mandates should reassess their investment strategies, as FPIs now have substantially greater flexibility in portfolio construction across the maturity spectrum.
For corporate issuers, particularly those in the shorter-duration bond segment, the relaxation may translate into increased demand from foreign investors, potentially improving pricing and liquidity for commercial paper and short-term non-convertible debentures.
Legal counsel advising FPIs should note that while the two key restrictions have been removed, the broader FEMA and SEBI regulatory framework for FPI debt investments remains in place. Issue-wise limits, minimum residual maturity norms, and overall aggregate limits on FPI investment in corporate bonds continue to apply. Compliance teams should update their monitoring frameworks to reflect the revised regulatory position while maintaining adherence to the remaining restrictions.