Changes to debt allocation mechanism for FIIs only cosmetic, say experts

Last Updated: Tue, Oct 09, 2012 19:45 hrs

The relaxation of debt allocation norms for foreign institutional investors (FII) is only slightly positive, and might not be enough to attract more foreign flows into the country, say market experts.

The markets regulator, Securities and Exchange Board of India (Sebi), on Saturday gave a breather to foreign investors by allowing them to carry forward 50 per cent of their debt holdings to the next calendar year.

“With effect from January 1, 2014, FIIs shall be allowed to re-invest during a calendar year to the extent of 50 per cent of their debt holdings at the end of the previous calendar year,” Sebi said.

The regulator had set a two-year time frame ending January 2014, after which all existing limits were supposed to lapse. However, the recent relaxation that allows 50 per cent of the debt holdings to be re-invested is only marginally positive, say market players.

Ashish Ghiya, managing director, Derivium Capital and Securities, said: “The relaxations are positive for FIIs. However, it adds one more layer to the existing rules. FIIs would like more simplified set of regulations.”

Ajay Manglunia, senior vice-president of Edelweiss Capital, said the changes made are more cosmetic in nature and might not help in reviving FII sentiment towards the debt market.

At the start of the year, the market regulator had stunned FIIs by making drastic changes to the debt allocation mechanism. In a circular in January, Sebi had said the reinvestment facility would be completely withdrawn. It had also said all existing FII limits would expire if the portfolio was churned twice or alternatively, after two years. Earlier, re-investment limit acquired by FIIs was available till perpetuity.

Before the sunset clause was introduced by Sebi, FIIs used to pay healthy premiums to acquire these investment limits. However, for the auctions that took place after January, foreign investors have bid close to the intrinsic value of the bonds.

For instance, FIIs had paid 115 basis points premium in the Rs 60,000-crore auction held in December last year to acquire limits for investing in government securities (G-Secs). However, post-January, this premium has dropped below five basis points.

Experts say the recent relaxation will not have any impact on the premiums paid by FIIs. For investing in the bond market, FIIs have to acquire limits, which are auctioned by Sebi every month.

Sebi on Saturday also reduced the utilisation period for G-secs and corporate debt limits to 30 days and 60 days, respectively. Earlier, FIIs were given 45 days to use their G-sec limits and 90 days to use their corporate debt limits.

Sebi also said FIIs will be allowed to use the unutilised in corporate debt infra long-term bonds without obtaining its prior approval till the overall FII investments reaches 90 per cent of the limit.

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