Corporate Bonds Not Included In the FII Debt Ceiling

In a decision that shall provide some much needed breathing space to Foreign Institutional Investors ("FIIs") the Securities and Exchange Board of India ("SEBI") has clarified vide its circular dated November 29, 2004 that corporate debt will henceforth be outside the ambit of the FII debt ceiling of USD 1.75 billion. The FII debt ceiling shall only be applicable to investments by FIIs in dated government securities and treasury bills both under the 100% debt route and the general 70:30 route (i.e. FIIs permitted to invest up to 30 per cent of their portfolio in debt).

The move comes close on the heels of the SEBI circular dated November 2, 2004 that clarified that the overall investment limit for FIIs coming through the 70:30 route would be enhanced to USD 200 million from USD 100 million previously, with a headroom of USD 25 million. Accordingly, it was decided that FIIs and their sub-accounts would be allowed to invest in government debt instruments till the aggregate investment reaches USD 175 million. Thereafter, they would have to approach SEBI for prior approval of limit allocation from the balance USD 25 million. The allocation under this limit would be done on a 'first come-first serve' basis. The FIIs would be granted 7 days time to invest and on the expiry of which the validity for investment by the FII would lapse.

The individual debt investment limits under the 100% debt route have also been realigned based on the remaining available limit of US$ 1.55 billion out of the overall cap of US $1.75 billion. Therefore, effectively the investment cap under the 100% debt route would be USD 1.55 billion.

This move is likely to send a positive signal to FIIs who till recently were unable to invest even in corporate debt as the limit of USD 1 billion was exhausted long back and there was no clarity as regards such limit or the expanded limit of USD 1.75 billion being applicable to corporate debts.

Source:

• SEBI Circular on ECB Limit, dated November 29, 2004.
• SEBI Circular on FII Investment in Debt Securities dated November 02, 2004.

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