What changed
Previously, FIIs and NRIs could only invest in specified capital market instruments under FEMA regulations. This circular explicitly allows them to subscribe to banks' perpetual debt (Tier I) and upper Tier II debt capital instruments, subject to new investment limits and reporting requirements.
What it means for you
Banks can now tap foreign investors to strengthen their capital base, especially Tier I and Tier II capital, which supports lending and regulatory compliance. The caps ensure diversified ownership and prevent excessive foreign influence. Banks must track and report these investments to RBI within 30 days of issue and ensure secondary market trades are reported via LEC returns.
What you must do
- Update internal policies to allow FII and NRI subscription to perpetual debt (Tier I) and upper Tier II instruments, adhering to the specified aggregate and individual caps.
- Ensure compliance with the 49% aggregate and 10% individual FII limit, and 24% aggregate and 5% individual NRI limit for each Tier I issue.
- Report issue-wise details of Tier I perpetual debt raised from FIIs/NRIs to RBI within 30 days using the prescribed proforma.
- Instruct custodians and designated banks to report secondary market trades in these instruments via daily LEC returns as per Schedule 2 and 3.
- Coordinate with DBOD guidelines for issuing these instruments and ensure all FEMA-related amendments are incorporated.
Who it affects
All Authorised Dealer banks issuing Tier I perpetual debt or Tier II debt capital instruments, Foreign Institutional Investors (FIIs) registered with SEBI, Non-Resident Indians (NRIs) investing in bank capital instruments, Custodians and designated banks handling secondary market trades
What are the investment limits for FIIs in Tier I perpetual debt instruments?
All FIIs together cannot hold more than 49% of each issue, and a single FII cannot exceed 10% of the issue.
Do NRIs have any specific limits for investing in Tier I perpetual debt?
Yes, aggregate NRI investment is capped at 24% of each issue, and a single NRI cannot invest more than 5% of the issue.
What reporting is required after issuing these instruments to foreign investors?
Banks must report issue-wise details (amount raised, number of investors) to RBI within 30 days. Secondary market trades must be reported daily via LEC returns by custodians and designated banks.