Monday, April 8, 2013

Foreign Investment in Debt Securities: Rationalization of Limits

With effect from April 1, 2013, the Government has rationalized the investment limits in debt securities for foreign institutional investors (FIIs) and other eligible investors such as qualified foreign investors, sovereign wealth funds, pension funds and the like. This has been implemented through circulars issued by SEBI (here) and RBI (here).

Previously, FII investment in debt (both Government and corporate) was based on various sub-limits which led to complexity due to the process and also the onerous conditions attached. The new regime combines various limits among different categories of investors. The salient features of the new limits are set out in RBI’s circular as follows:

(i) Government Debt limit: Government securities of USD 25 billion by merging the existing sub-limits under Government securities [(a)USD 10 billion for investment by FIIs in Government securities including Treasury Bills and (b) USD 15 billion for investment In Government dated securities by FIIs and long term investors]; and

(ii) Corporate Debt Limit: Corporate debt of USD 51 billion by merging the existing sub-limits of Corporate debt [(a) USD 1 billion for Qualified Foreign Investors (QFIs), (b) USD 25 billon for investment by FIIs and long term investors in non-infrastructure sector and (c) USD 25 billion for investment by FIIs/QFIs/long term investors in infrastructure sector].

While this streamlining is essential in terms of policy, it is unclear whether this measure itself will act as boost to the debt markets in India, which continue to suffer from lack of depth compared to its equity markets.

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