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What is Voluntary Retention Route (VRR)?

Voluntary Retention Route (VRR) is a channel for Foreign Portfolio Investors (FPIs) to invest in debt markets in India.

What is Voluntary Retention Route (VRR)?

Reserve Bank of India (RBI), in consultation with the Government of India and Securities and Exchange Board of India (SEBI), introduced on March 01, 2019, a separate channel called the ‘Voluntary Retention Route’ (VRR), to enable Foreign Portfolio Investors (FPIs) to invest in debt markets in India. 

Who are eligible investors under VRR?

Any FPI registered with SEBI is eligible to participate through VRR. Participation through this Route is voluntary.

What are the categories of investment under VRR?

Category Voluntary Retention Route for FPI investment in
‘VRR-Corp’ Corporate Debt Instruments
‘VRR-Govt’ Government Securities
‘VRR-Combined’ Instruments eligible under both VRR-Govt and VRR-Corp

Which instruments are eligible under VRR?

  • Under VRR-Govt, FPIs are eligible to invest in any Government Securities i.e., Central Government dated Securities (G-Secs), Treasury Bills (T-bills) as well as State Development Loans (SDLs). 
  • Under VRR-Corp, FPIs may invest in any instrument listed under Schedule 1 to Foreign Exchange Management (Debt Instruments) Regulations, 2019, other than those specified at 1A(a) and 1A(d) of that schedule. However, investments in Exchange Traded Funds investing only in debt instruments are permitted.
  • Repo transactions, and reverse repo transactions. ‘Repo’ and ‘Reverse Repo’ have the same meaning as defined in Section 45U(c) of Reserve Bank of India Act, 1934; and excludes repo and reverse repo conducted under the Liquidity Adjustment Facility and the Marginal Standing Facility.

What are the investment limits under VRR?

  • The investment limit under VRR has been increased from ₹1,50,000 crore to ₹2,50,000 crore with effect from April 01, 2022.
  • Investment limits is available ‘on tap’ and allotted on ‘first come, first served’ basis. The ‘tap’ is kept open till the limit is fully allotted.
  • Investment through VRR is in addition to the General Investment Limit. ‘General Investment Limit’, for any one of the three categories, viz., Central Government Securities, State Development Loans or Corporate Debt Instruments, means FPI investment limits announced for these categories under the Medium Term Framework.
  • Investment under VRR is allocated among VRR-Govt, VRR-Corp, and VRR-Combined as decided by RBI.

What is the minimum retention period under VRR?

  • The minimum retention period is 3 years.
  • Retention Period is the time period that an FPI voluntarily commits for retaining the Committed Portfolio Size (CPS) in India.
  • Committed Portfolio Size (CPS), for an FPI, is the amount allotted to that FPI.

What options are available to FPIs at the end of retention period?

Prior to the end of the committed retention period, an FPI may opt to continue investments under VRR for an additional identical retention period. 

In case an FPI decides not to continue under VRR at the end of the retention period, it may –

  1. Liquidate its portfolio and exit, or 
  2. Shift its investments to ‘General Investment Limit’, subject to availability of limit under ‘General Investment Limit’, or 
  3. Hold its investments until its date of maturity or until it is sold, whichever is earlier

FPIs that wish to exit their investments (fully / partly), prior to the end of the retention period may do so by selling their investments to another FPIs. 

What are other requirements under VRR?

  • FPIs shall open one or more separate Special Non-Resident Rupee (SNRR) account for investment through the Route. 
  • FPIs may open a separate security account for holding debt securities under VRR.
  • FPIs may apply for investment limits online to Clearing Corporation of India Ltd. (CCIL) through their respective custodians.

What are the benefits of investing through VRR?

  • Investments through VRR are free of the macro-prudential and other regulatory norms applicable to FPI investments in debt markets, provided FPIs voluntarily commit to retain a required minimum percentage of their investments in India for a period. 
  • Income from investments through VRR may be reinvested. Such investments is permitted even in excess of the CPS.
  • FPIs investing through VRR are eligible to participate in repos for their cash management, provided that the amount borrowed / lent under repo shall not exceed 10% of their investment under VRR.
  • FPIs investing under VRR are eligible to use any currency / interest rate derivative instrument, OTC / exchange traded, to manage their interest rate risk or currency risk.

Which are the channels for FPIs to invest in debt markets?

Foreign Portfolio Investors (FPIs) can invest in government securities and corporate bonds through three channels –

  1. Medium-Term Framework (MTF) introduced in October 2015
  2. Voluntary Retention Route (VRR) introduced in March 2019
  3. Fully Accessible Route (FAR) introduced in April 2020


References

Reserve Bank of India. (2022, February 10). '‘Voluntary Retention Route’ (VRR) for Foreign Portfolio Investors (FPIs) investment in debt'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12228&Mode=0

Reserve Bank of India. (2022, February 10). 'RBI reopens allotment of investment limit under the Voluntary Retention Route for Investments by Foreign Portfolio Investors'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=53256#:~:text=The%20investment%20limit%20under%20VRR,period%20shall%20be%20three%20years.


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