India will allow foreign investors to re-invest up to 50 percent of their debt holdings from the previous calendar year starting in January 2014, market regulator Securities and Exchange Board of India (SEBI) said in a statement.
SEBI also cut the time period to use up corporate debt limits to 60 days from 90 days, while government debt limits will need to be used up in 30 days from 45 days, effective immediately, the regulator said.
The measures, first announced last month, tweak some of the rules seen hampering investments in debt, and free up debt auction limits faster so they are sold to those foreign investors who are more willing to use them.
Foreign institutional investors (FIIs) with authorised licenses can participate in the monthly auction for debt limits for corporate and government bonds, purchasing quotas which provide them with the right to invest in debt up to the limit bought.
However, domestic debt markets are marked by complex regulations for FIIs, denting demand at a time when yields are high and India needs inflows to plug its current account deficit.
"Simplification of the process and elimination of the need for multiple approvals will create higher interest levels amongst FIIs and will also attract newer set of FIIs," said Mahendra Jajoo, head of fixed income at Pramerica Mutual Fund.
Foreign investors can now also start buying and using up limits for long-term infrastructure corporate debt without SEBI approval for up to 90 percent of the total category limit of $12 billion, the SEBI notification showed.
Because of the complex set of rules, FIIs have, at times, bid for the right to purchase a bigger share of debt than they end up actually investing, skewing the demand for bonds.
Debt limits in government bond and corporate bonds without any investment restrictions have seen strong demand from FIIs.
However, long-term infrastructure corporate debt has not seen much interest because of a one-year lock-in provision, even as the country needs more investment because of frequent power cuts, poor roads and antiquated railways.
Other measures also hamper broader demand, including a withholding tax in rupee bonds of 20 percent.
India's corporate bonds have rallied this year, with the five-year corporate bond benchmark yield dropping to 9.01 percent from 9.39 percent a year ago.