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'1st come, 1st serve' mooted for FIIs in G-Sec

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Prashant K Sahu New Delhi
Last Updated : Feb 05 2013 | 1:20 AM IST
The Deepak Parekh panel on infrastructure has recommended replacing the existing individual allocation process in government securities for the pure debt-oriented foreign institutional investors (FIIs) with a "first come first serve rule".
 
The FIIs enter India through two routes. One is the 70:30 route for equity, under which the FIIs can invest a maximum 30 per cent in debt and the limit is allocated on a first-come first-serve basis. The second route is for the pure debt FIIs, who invest in debt only.
 
To facilitate foreign investment in infrastructure, the panel, in a recent report to Finance Minister P Chidambaram, has also suggested that the FIIs be permitted to invest in bonds issued by infrastructure companies, over and above the corporate debt investment limit fixed for them.
 
If accepted, these changes will result in better utilisation of FII investment limits and attract genuine long-term investors to the core sector.
 
"Whatever quota was given to individual FIIs in government securities were largely not filled up due to small size. If 'X' amount of security is available, whosoever comes first should get that. It is a welcome proposal," said PRIME Database Managing Director Prithvi Haldea.
 
Taken together, the FIIs and their sub-accounts are now allowed to hold $3.2 billion in government bonds and $1.5 billion in corporate bonds.
 
Currently in the pure debt route, individual limits are allocated to FIIs in a manner that results in low absolute limits for each FII, weakening their appetite to actively utilise their respective limits.
 
Whatever little trading takes place under these limits is largely motivated by arbitrage to gain from exchange rate fluctuations.
 
As total amount of foreign investment in rupee bonds is tightly controlled, many investors do not consider it worthwhile to take the pain to register due to lack of enough rupee papers.
 
According to the Parekh panel suggestion, once limits start getting sufficiently utilised, additional limits should be considered, at least for investment in long term debt instruments issued by the infrastructure companies.
 
"India's resource requirements are so large, the FII money will definitely benefit the infrastructure sector," Haldea said. According to government estimate, India requires $320 billion in five years which, the panel has suggested, should be revised to $475 billion.

 

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First Published: Jun 18 2007 | 12:00 AM IST

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