India's central bank proposed the introduction of a separate investment channel in domestic debt markets for foreign investors that will be exempt from regulatory provisions.

Foreign investors investing through the voluntary retention route will be exempt from regulatory provisions applicable to foreign entities investing in the Indian debt markets, but will have to commit to retain a required minimum percentage of their investments in India for a period no shorter than three years.

The Reserve Bank of India said in an Oct. 5 discussion paper that the aim of the proposed rules is to attract long-term and stable foreign portfolio investors to India's debt markets, while providing foreign investors with operational flexibility to manage their investments.

The total amount that may be invested through the voluntary retention route will be allocated to each foreign investor through an auction process. Each investor will place bids for the amount it proposes to invest and the retention period of that investment, which will be at least three years, or as determined by the RBI for each auction.

Investments in government securities and corporate debt will have separate processes.

A foreign investor will have to invest a minimum of 67% of its committed portfolio size during the retention period, and this requirement will be adhered to on an end-of-day basis. Cash or deposits will not count toward the committed portfolio size.

At the end of the retention period, a foreign portfolio investor can opt to continue with an additional period of the same amount of time. It can also choose to liquidate its portfolio and exit, or shift its investments to the general investment limit.

The central bank has invited comments on the discussion paper until Oct. 19.