The relaxation of debt allocation norms for foreign institutional investor (FII) are only slightly positive and may not solely help in attracting more foreign flows into the country, say market experts.
Securities and Exchange Board of India (Sebi) on Saturday gave a breather to foreign investors by allowing them to carry forward 50% of their debt holdings to the next calendar year.
Sebi in a press release said, “With effect from January 01, 2014, the FIIs shall be allowed to re-invest during the calendar year to the extent of 50% of their debt holdings at the end of the previous calendar year.”
Sebi had set a two year time frame ending January 2014, post which all the existing limits were suppose to lapse. However, the recent relaxation that allows 50% of the debt holdings to be re-invested is only marginally positive, say market players.
Ashish Ghiya, MD, Derivium Capital & 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, Edelweiss Capital, said the changes made are more cosmetic in nature and may 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 In a circular in January 2012, Sebi had said that the reinvestment facility will be completely withdrawn. It had also said that all existing FII limits would expire if the portfolio is 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 you use pay healthy premiums to acquire these investment limits. However, for the auctions that have taken place post-January, foreign investors have bid close to the intrinsic value of the bonds.
For instance, the 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 5 basis points.
Market 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 for use their corporate debt limits.
Sebi also said that 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% of the limit.