P0010 Purpose Code
According to the RBI, it is for transactions related to “Foreign portfolio investment in India in debt securities, including debt funds.”
When a foreign investor sends money to invest in debt securities in India, such as government bonds, corporate bonds, or debt mutual funds. This type of investment is called foreign portfolio investment (FPI) in debt, where the investor earns income mainly through interest rather than owning a part of the company. These investments are usually for a shorter period and are considered less risky compared to equity investments. The money coming into India for these debt investments must be reported using P0010.
For Example, A foreign investor sends $1 million to India to buy corporate bonds issued by an Indian infrastructure company. These bonds will pay the investor interest over time. Since the money is being used to invest in debt instruments and not in company shares, the transaction is reported under Purpose Code P0010 as foreign portfolio investment in debt securities.
What Are The Types of Debt Securities in which An Investor Can Invest?
- Government Securities (G-Secs) – These are bonds issued by the Government of India to borrow money from the public. When an investor buys a G-Sec, they are lending money to the government in return for a fixed interest over a specific period. These are considered very safe investments because they are backed by the government.
- Non-Convertible Debentures (NCDs) – These are a type of loan taken by Indian companies from investors. When someone invests in NCDs, they are lending money to the company for a fixed period. In return, the company pays a fixed interest regularly. Unlike shares, NCDs do not give ownership in the company and cannot be converted into shares later. They are simply a way for companies to raise money and for investors to earn interest income.
- Treasury Bills (T-Bills) – These are short-term loans issued by the government to raise money for a short period, usually up to one year. They do not pay interest directly but are sold at a discount and redeemed at face value, meaning the investor earns the difference as profit. T-Bills are considered safe and low-risk investments because they are backed by the government.
- Bonds – Bonds are a way for Indian companies to borrow money from investors. These can be of two types: listed on the stock market or not listed. The company promises to return the money after a certain time with interest. These bonds can be in Indian Rupees or foreign currency, but only as allowed by RBI rules.
- State Development Loans (SDLs) – These are bonds issued by individual state governments in India to raise money for funding their development projects, like infrastructure, education, and healthcare. These are similar to central government securities but are issued by states, and they come with a fixed interest rate and maturity period. Investors, including foreign portfolio investors (FPIs), can buy SDLs.
- Non-Convertible Debentures (NCDs) – NCDs are a type of loan or debt instrument issued by companies to raise money. Investors who buy NCDs earn a fixed rate of interest over a set period, but unlike convertible debentures, these cannot be converted into company shares later. They are simply repaid in cash at maturity, making them a stable fixed-income option for investors.
- Debt Mutual Funds – These are investment funds that mainly put money into fixed-income securities like bonds, government securities, debentures, and other debt instruments. These funds aim to provide regular and stable returns with lower risk compared to equity funds. Investors earn through interest income and possible capital gains if bond prices rise.
- Masala Bonds – These are rupee-denominated bonds issued by Indian companies (including government bodies) to raise funds from foreign investors. The exchange rate risk is borne by the investor, as repayments are made in rupees. This allows Indian companies to access global funds without facing currency risk.
- Municipal Bonds – These are a type of investment issued by urban local bodies like city governments to raise money for infrastructure projects such as roads, water supply, and sanitation. Investors lend money by buying these bonds, and in return, the local body promises to pay interest and return the amount after a fixed time. These bonds help cities fund development without relying only on government grants.
Important Rules for Investing
- Investment Must Be Lawful – This means that the investor should follow the guidelines mentioned under the Foreign Exchange Management Act (FEMA), laid down by the RBI.
- Use of Proper Banking Channels – Foreign investors must transfer funds through proper banking channels, using international systems like SWIFT. The remittance must go through an Authorised Dealer (AD) bank in India to ensure transparency and compliance with RBI and FEMA rules.
- Use of Fully Accessible Route (FAR) – This is a method approved by the Reserve Bank of India (RBI) to allow foreign investors to buy certain types of Indian government bonds without many restrictions.
- Voluntary Retention Route (VRR) – Under VRR, investors agree to keep their money in India for a minimum period, usually three years. In return, they get certain benefits, such as fewer rules and easier investment procedures compared to other routes. This system helps bring stable, long-term foreign investment into the country while giving investors more freedom and fewer restrictions.
- Eligible Investors – Investors who are officially registered as Foreign Portfolio Investors (FPIs) with SEBI (Securities and Exchange Board of India) are allowed to invest in India under this route. Without SEBI registration, foreign investors cannot make portfolio investments in Indian equity shares using Purpose Code P0010.
- Investment Limits – RBI and SEBI have put a cap on the investment percentage in debt securities. Let us have a look at the capping in various types of bonds and debt securities.
– Corporate Bonds: FPIs can invest up to 15% of the outstanding stock of corporate bonds.
– Government Securities (G-Secs): The cap is 6% of the outstanding stock.
– State Development Loans (SDLs): The limit is 2% of the outstanding stock.
– Corporate Debt Securities: An FPI (including related FPIs) can invest up to 50% of any single issue.
- Holding Period – Certain investment instruments, like long-term bonds, may come with a minimum holding period, which means the investor must keep the investment for a set time before selling or transferring the capital earned from it. This period is usually between 1 to 3 years.
- End-Use Restrictions – This means the funds cannot be used for things like buying real estate, farming activities, or investing in short-term non-convertible debentures (NCDs) with less than one year’s maturity, unless the RBI has given special permission. These rules help make sure the money is used for productive and approved purposes in the country.
- Reporting and Compliance – This code is used by both foreign investors and Indian companies receiving investment. The foreign investor utilises this code when transferring funds to India to ensure that the remittance is properly classified. This classification is handled by the banks involved in the transfer, typically the remitting bank abroad and the Authorised Dealer (AD) bank in India. However, the Indian company receiving the investment has the primary responsibility for reporting the Foreign Direct Investment (FDI) to the Reserve Bank of India (RBI).
- Time Limit – The Authorised Dealer (AD) bank must report the foreign inward remittance using Purpose Code P0010 to the RBI on the same day or latest by the next reporting cycle, typically within 24 hours through the Foreign Exchange Transactions Electronic Reporting System (FETERS).
- No Guaranteed Returns – There are no guaranteed returns for investors under this type of investment. This means the company or issuer cannot promise a fixed profit or return. Instead, the money an investor earns will depend on how the market performs, so returns can go up or down based on market conditions.
How to Report the Purpose of The Transaction to The RBI by Giving the Purpose Code:
Investors investing money in India must file several forms before starting the process. Usually, the transactions are via bank transfers, and your bank will ask you to provide a purpose code by giving a form to fill out. If you have any doubts or questions, feel free to reach out to us via email- support@bankerpanda.com, and we will try our best to help you out.
Tax or No Tax?
Under Purpose Code P0010, when a foreign investor sends money to India to invest in debt securities, no tax is levied at the time of remittance. The act of transferring funds itself is not taxable. However, tax is applicable later when the investor earns income from the investment, such as interest or capital gains. Interest income is typically subject to withholding tax, and capital gains are taxed based on the holding period and applicable tax rates. Therefore, taxation occurs on the earnings from the investment, not on the amount sent into India.
Note: An investor, whether a foreign individual or a foreign company, who invests in an Indian company or bonds issued by the Union government does not receive any profits directly from the Indian government or from the company in which they invested. They only receive income from the interest on the debt securities.
P0010 Purpose Code Use Case Examples:
Here are some real-life examples where the RBI’s Purpose Code P0010 would be used to report transactions in India:-
- Investment from An FPI in Government Bonds:-
A foreign portfolio investor based in Singapore invests Rs. 50 crore in Indian Government Securities (G-Secs) through the Reserve Bank of India’s Fully Accessible Route (FAR). The FAR allows certain types of G-Secs to be purchased freely by foreign investors without restrictions. This transaction, involving the transfer of funds into India to buy these bonds, is officially reported under the code P0010.
- Investment Firm Invests by Buying Corporate Bonds:-
A U.S.-based investment firm has invested $40 million in non-convertible debentures (NCDs) issued by Reliance Industries. These debentures are traded on a recognised stock exchange in India. When the firm transfers funds to India for this investment, it is reported under the code P0010, which signifies that the money is being used to invest in corporate debt instruments.
- Investment in Debt Mutual Funds:-
A foreign portfolio investor (FPI) invests $1 million in an Indian debt mutual fund that mainly holds fixed-income instruments like treasury bills, commercial papers, and bonds. The money is sent through the FPI’s custodian bank in India, and the investment is reported under the code P0010.
- Sovereign Wealth Fund Investment:-
A Middle Eastern sovereign wealth fund invests in long-term infrastructure bonds issued by the National Highways Authority of India (NHAI). As these are marketable debt securities, the inward remittance is recorded under P0010.
- Investment by a Pension Fund in an Indian Firm:-
A Canadian pension fund invests money in a group of Indian debt securities that are valued in Indian rupees. These investments are made through a local custodian in India who helps manage them. This includes both private company debentures and government bonds. This type of investment is recorded under the code P0010 for reporting purposes.
- Investment via Voluntary Retention Route (VRR):-
An overseas investor decides to invest $50 million in India’s debt market using the VRR scheme, which requires the money to stay in India for at least three years. The investor puts $30 million into bonds issued by an Indian company that pays 7.5% interest per year, and $20 million into state government bonds earning 6.8% interest. By using VRR, the investor benefits from fewer restrictions, such as limits on how much can be invested in certain securities, while India benefits from more stable, long-term funds.
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