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Initiating the much-needed reforms for foreign investors in the debt market, the government today said it would merge the existing sub-limits and, instead, have overall caps for only two broad categories — government securities and corporate bonds. The change would become operational from April 1.
Addressing the National Editors’ Conference here, Finance Minister P Chidambaram said the ceiling of $1 billion for qualified foreign investors (QFIs) and $25 billion for foreign institutional investors (FIIs) in corporate bonds, besides $25 billion for FIIs in long-term infra bonds, would be merged — retaining the overall cap for corporate bonds at $51 billion.
He added, the sub-limits for FIIs in government securities ($10 billion) and dated securities ($15 billion) and other categories would be merged to retain the overall cap of $25 billion. This means the overall ceiling for investment in G-sec and corporate bonds would not change, at least for now.
Chidambaram announced these measures “to encourage greater foreign investment in rupee-denominated debt instruments and help develop rupee debt markets”.
Besides these, he said the government was “steadily and surely” working on next generation of reforms to bring the economy back on the high-growth path, and exuded confidence the food security Bill would be passed in this Budget session of Parliament.
The entire limit in G-sec, as well as corporate bonds, would be available to all eligible classes of foreign investors — FIIs, sovereign wealth funds and QFIs. The room created by unifying the categories would replace Sebi’s current auction mechanism to allocate debt limits for corporate bonds by the “on tap” system, currently in place for infrastructure bonds.
To allow large investors to plan their investments, the government would review the foreign investment limit in corporate bonds when 80 per cent of the limit was exhausted, he said. The limit on government bonds would also be enhanced, when needed, on the basis of demand from foreign investors, macroeconomic requirements and the offshore-onshore balance.
The annual increase in the government bond limit would remain within five per cent of the central government’s gross annual borrowing, excluding buybacks.
“The removal of sub-limits will offer a lot of operational ease to foreign investors,” said Jyoti Rai, head (marketing), SBI SG Securities Services.
A sub-limit for investments in short-term instruments of initial maturity of less than one year, such as treasury bills and commercial papers, would be decided on the basis of FIIs’ holdings in these instruments, so that the existing investments are not hit. These sub-limits would not be reopened for review until the ratio of India’s short-term external debt on residual maturity of up to one year slipped below 25 per cent of total external debt, the finance minister said.
The entire limit in both government securities and corporate bonds categories will be made available to all eligible classes of foreign investors, including FIIs, sovereign wealth funds and QFIs. Because of the room created by unifying categories, the current Sebi auction mechanism allocating debt limits for corporate bonds will be replaced by the “on tap” system currently in place for infrastructure bonds.
Chidambaram said in order to allow large investors plan their investments, the government will review the foreign investment limit in corporate bonds when 80% of the current limit is taken up. It will also enhance the limit on government bonds, as and when needed, based on utilization levels, demand from foreign investors, macroeconomic requirements and a prudent offshore-onshore balance. The annual enhancement of the government bond limit will remain within 5% of the gross annual borrowing of the central government excluding buybacks.
In January this year, the Reserve Bank had hiked FII investment limits in government securities and corporate bonds by $5 billion each, taking the total cap in domestic debt to $76 billion.
