FII ceiling in debt to exclude corporate bonds

Applicable to 100% as well as 70:30 debt route.

The government has taken corporate bonds out of the purview of the total foreign investment limit in debt instruments to encourage and create demand for corporate bonds.

The government has clarified that the enhanced $1.75 billion cumulative debt investment limit will be only for investments in government securities and treasury bills.

"Investment in securities other than dated government securities and T-bills, that is corporate debt, would not be reckoned within the sub-ceiling of $1.75 billion," according to the clarification issued by the government.

This will be applicable both to foreign institutional investors coming under the 100 per cent debt route (that is FIIs who invest only in debt) and those coming in through the 70:30 debt route (that is those allowed to invest 30 per cent of their portfolio equities).

Debt traders said this was being done to create depth and liquidity in corporate bonds as well as to attract FIIs into it.

At present there is little or no interest in corporate debt from foreign investors. As a dealer put it, "they might like to take position on shorter maturity papers such as one-year bond."

According to figures available on the Sebi website, the outstanding FII investment in gilts and T-bills through 70:30 route as on November 29, 2004 was of $178.27 million, far below the limit prescribed.

Overall investment limit under the 70:30 route in dated gilts and treasury bills is now $200 million. During November, FIIs have invested $315 million in debt, while in the whole of 2004 so far there has actually been an outflow of $86.80 million.

Earlier this month it had been clarified that after raising of the overall investment limit, the limit for FIIs coming through the 70:30 route would be enhanced to $200 million from $100 million previously with a headroom $25million has been decided that is FIIs and their sub-accounts are free to invest till the total investment reaches $175 million. Thereafter, they will have to approach Sebi for prior approval of limit allocation.

Individual debt investment limits earlier allocated for 100 per cent FIIs and sub-accounts were realigned based on remaining available limit of $1550 million of the overall cap of $1.75 billion.