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The new regulations of Securities and Exchange Board of India (Sebi) on foreign holdings of rupee-denominated corporate bonds will reduce options for companies to diversify their funding sources, says a report.
Last week, the market regulator had said that foreign purchases of rupee-denominated corporate notes would only be permitted through auction once the foreign holdings reached 95 per cent of the cap.
"New, tighter regulations on foreign holdings of rupee-denominated corporate bonds and offshore issuance will reduce options for companies to diversify their funding sources, at least temporarily," Fitch Ratings said in a report.
The new norms will also prevent the use of certain complex transaction structures, which have recently gained popularity among corporate issuers, it said.
At present, the foreign portfolio investors can invest up to Rs 2,44,300 crore ($ 51 billion) in corporate bonds issued by domestic companies.
Foreign ownership is already above 95 per cent of the cap, which means these restrictions have come into effect, the report said.
Issuance of offshore 'masala bonds' will also cease entirely until foreign ownership falls to 92 per cent of the cap.
"The hiatus on masala bond issuance triggered by SEBI's regulations has put the plans of some large corporates on hold. The decision could dent confidence in the instrument and hold back the market's medium-term development," the report said.
The first masala bonds were only issued in mid-2016, and the market still lacks the depth that would make them more attractive to foreign investors.
Better quality issuers, such as NTPC, should be able to reconsider masala bonds, if and when the cap on foreign ownership of rupee bonds is eventually raised or foreign ownership falls sufficiently, it said.
A separate ruling earlier in the month by the Reserve Bank had already tightened the rules on masala bond issuance, banning their sale to related entities, lowering the cap on spread over government bonds, and extending the minimum maturity.