Sebi to allow FIIs to fully reinvest debt papers

In order to expand the presence of foreign investors in the corporate debt market, the market regulator will allow full reinvestment of their debt papers soon. The finance ministry is pushing the Securities and Exchange Board of India (Sebi) to reinstate the facility which was discontinued from January this year.

The move, besides injecting liquidity in the debt market, will also be a precursor to eliminating the present cumbersome auction system for debt that foreign institutional investors (FIIs) can hold. This would create better price recovery in the market and make more companies access debt.

The government and the financial market regulators have been working on deepening the corporate bond market given the fact that the banking system and insurance industry will not be able to keep up with the pressure of funding infrastructure projects.

On November 7, Sebi had allowed FIIs to re-invest half of their investments in debt holdings to the next calendar year beginning January 2014. Once implemented, FIIs and their sub-accounts can re-invest 50 per cent of their debt holdings.

"With a view to provide operational flexibility, beginning January 1, 2014, it has been decided that FIIs/sub-accounts can reinvest during each calendar year to the extent of 50 per cent of their debt holding at the end of the previous calendar year," a circular said.

This facility could now be extended to their full holdings. Further, the finance ministry is also working on "doing away with the concept of auction for allocation of debt investment limits to FIIs". The joint secretary, capital market, in department of economic affairs has already written to Sebi requesting its views on the issue.

At present, FIIs along with mutual funds and qualified foreign investors are allowed to invest up to $75 billion in debt every year in several categories including government securities, corporate bonds and infrastructure bonds with each having a separate cap as well as tenor and also lock-in restrictions.

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