Previous Year Question

In the Union Budget 2020–21, the Government of India announced an increase in the Foreign Portfolio Investment (FPI) limit in Corporate Bonds from 9% to 15% of the total outstanding stock of corporate bonds. The announcement was made by Finance Minister Nirmala Sitharaman while presenting the Budget on 1 February 2020.

Foreign Portfolio Investment (FPI) refers to investment by foreign investors in a country's financial assets, such as Equities, Bonds, and other Securities. The objective of such investors is generally to earn financial returns rather than establish direct control over the management of the concerned enterprise.

A Corporate Bond is a Debt Instrument issued by companies to raise capital. An investor purchasing a bond lends money to the company, in return for which the company pays interest and principal according to specified terms.

Changes in the FPI limit under Union Budget 2020–21:

This limit did not represent the percentage of foreign ownership in an individual company but the permitted Foreign Portfolio Investment limit as a proportion of the total outstanding value of corporate bonds in India.

The main objective of this decision was to develop the Indian Corporate Bond Market, increase the availability of foreign capital, and expand financing sources for companies.

The Reserve Bank of India (RBI) prescribed the FPI limit in corporate bonds at 15% for the financial year 2020–21 through its circular dated 30 March 2020. Under this framework, the investment limits were fixed at ₹4,29,244 crore for April–September 2020 and ₹5,41,488 crore for October 2020–March 2021.

In India, the Securities and Exchange Board of India (SEBI) plays a role in the registration of Foreign Portfolio Investors and regulation of the securities market, while the RBI plays an important role in implementing foreign investment limits in debt securities and foreign exchange regulations.