SEBI Moves to Simplify Compliance for Government Bond FPIs

The Securities and Exchange Board of India (SEBI) is proposing a significant overhaul of compliance requirements for foreign portfolio investors (FPIs) who choose to invest exclusively in Indian government bonds (IGBs).

This move, outlined in a recent draft paper open for public comment until June 3, 2025, aims to streamline processes, alleviate regulatory burdens, and align certain norms with those of the Reserve Bank of India (RBI).

The proposal targets FPIs investing through the Voluntary Retention Route (VRR) and the Fully Accessible Route (FAR).

Strategic Timing Amid Global Bond Index Inclusion

The timing of SEBI's proposal is noteworthy. It follows closely on the heels of India's inclusion in major global bond indices, including the JPMorgan Global Bond Index and the Bloomberg Emerging Market Bond Index, with inclusion in the FTSE Russell Emerging Markets Government index expected from September.

These inclusions are anticipated to drive substantial passive inflows into Indian government securities.

The regulator's effort is designed to capitalise on this momentum by making it easier for foreign investors focused solely on government debt to operate within India.

Data indicates a growing appetite for Indian government bonds via these routes. Aggregate FPI holdings in FAR-eligible bonds have risen significantly, reaching ₹3.06 lakh crore by March 2025, up from ₹1.74 lakh crore a year prior. This also represents a nearly ten-fold increase from 2021 levels, with FAR investments already exceeding 100% of the general foreign investment limit for the first half of FY26.

Investment limits under VRR also saw an increase, from ₹1.75 lakh crore to ₹2.05 lakh crore in the same period. SEBI views the simplification of onboarding and rationalisation of compliances as crucial steps to further facilitate these investments.

The proposal also aligns with a risk-based approach and the goal of optimum regulation.

Key Compliance Relaxations for IGB-FPIs

For FPIs designated as 'IGB-FPIs',  those investing only in IGBs- SEBI has suggested several key relaxations. These include:

Exemption from furnishing investor group details: Currently required for monitoring investment caps, this disclosure would be waived for IGB-FPIs as bond investments under FAR/VRR do not have such group-based limits. Clubbing rules for group investments would similarly not apply.

Relaxed Timelines for Material Changes: The period for disclosing material changes is proposed to be a uniform 30 days for IGB-FPIs, a relaxation from the current requirement of reporting within 7 or 30 days depending on the nature of the change.

Aligned KYC Reviews: The periodicity of Know Your Customer (KYC) reviews for these FPIs would be brought in line with RBI's norms, requiring updates every 2, 8, or 10 years based on the investor's risk category, rather than SEBI's current annual or triennial review cycle.

Greater flexibility for NRI/OCI/RI Investments: Restrictions on non-resident Indians (NRIs), overseas citizens of India (OCIs), and resident Indian individuals (RIs) contributing to an FPI's corpus are proposed to be removed for IGB-FPIs.

Currently, such contributions are capped at 25% individually and 50% in aggregate, and control is not permitted. While NRIs and OCIs can already invest directly in FAR government bonds without limits, RIs would still need to invest via the Liberalised Remittance Scheme (LRS) and through global funds with less than 50% Indian exposure.

Conclusion: Aligning Regulation with Market Integration

SEBI also envisages a mechanism for existing FPIs to transition to the IGB-FPI category. This would involve declaring their intention and divesting all holdings other than those permitted under the IGB framework, along with closing related demat and trading accounts.

A reverse transition back to regular FPI status would also be possible upon making appropriate disclosures and complying with standard regulations.

The proposals underscore SEBI's proactive approach to facilitating foreign investment in India's sovereign debt markets, particularly as the country integrates further into global bond indices.

The consultation period offers market participants an opportunity to provide feedback on these potential regulatory adjustments.

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