To encourage sovereign wealth funds (SWFs) and pension funds to invest in the Indian debt market, the Securities and Exchange Board of India (Sebi) is working on a framework to give these preferential treatment. Currently, these investors, who typically invest for the long term, do not have significant investments in the Indian debt market.
Sebi has given in-principle approval to suggestions by market entities that preferential treatment be given to long-term investors, such as SWFs and pension funds while allocating debt limits. China gives preferential allotment to SWFs in debt limits for foreign institutional investors (FIIs).
According to people privy to the development, Sebi is working on an administrative framework to allow discretionary allotment to these investors. The regulator might consider a separate limit within the current FII debt limit. It might also have to set up a separate dispensation framework to differentiate these investors and provide them greater flexibility.
SWFs are government-controlled special purpose investment funds investing in a variety of assets. SWFs from select countries are given more flexibility while investing in listed companies. They have an investment cap of 20 per cent, against 10 per cent for other investors.
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Experts said the move would encourage such funds to invest in high-yielding Indian paper. The domestic debt market would benefit, as these investors typically make large-size investments for relatively longer terms. “It is necessary to attract real long-term money into the country. Currently, only a small block of the investment limit is available to foreign investors. If SWFs and pension funds are to be attracted, a larger limit and greater flexibility would be needed,” said Hitendra Dave, managing director and head of global markets (India), HSBC.
“Sovereign funds are still not making any significant investment in the debt market. Preferential treatment would be good encouragement to ensure their participation,” said Ajay Manglunia, senior vice-president of Edelweiss Financial Services.
Currently, FIIs can invest $65 billion in the Indian debt market. Turn to TSI, Page 2 >
This includes government securities, corporate bonds and infrastructure debt. Earlier, debt limits were allocated to FIIs on a first-come-first-served basis. This was later changed to a competitive bidding process.
Some, however, believe preferential treatment to SWFs and pension funds wouldn’t add significant value, unless these funds don’t invest in infrastructure debt or papers other than those with the highest grade. “There is enough demand for short-term paper from FIIs. To deepen the market, we need investors who would invest in long-term infra paper, or 20-year paper. I doubt SWFs would be interested in such instruments,” Dave said.
