RBI favours consolidated debt limit for FIIs

The Reserve Bank of India (RBI) is in favour of a consolidated debt limit, similar to that in the equity market, for foreign institutional investors (FIIs). In a suggestion sent to the Securities and Exchange Board of India (Sebi), RBI has stated that the consolidated debt limit should be on a first-cum-first-served basis.

Debts for FIIs comprise government securities and corporate debt. Corporate debt comprises corporate bonds and commercial papers, while government papers include government bonds and treasury bills.

While RBI made this suggestion a few months ago, Sebi is yet to respond. However, sources said that the market regulator was of the view that continuous monitoring of the limits on a daily basis might become an issue.

Sources close to the development said RBI feels that a single foreign investor or a group of FIIs cornering debt did not seem to be a concern since these were short-term portfolio investments.

In any case, the moment the investments of FIIs neared the consolidated limit, Sebi could notify the same to them.

Besides, this system of allocation would also boost trading in government and corporate papers and improve participation at the retail level.

In the equity market, there is a consolidated limit for FII investments in a particular stock. And when their investments in a stock get closer to the limit, RBI informs them through a notification.

Sebi has already imposed caps on individual FII investments in debt. In February 2009, when the government increased the limit for corporate debt investment by FIIs from $6 billion to $15 billion, Sebi had allocated around $8 billion through open bidding. However, in the open bidding also, there was a limit of Rs 10,000 crore per single entity.