Sebi panel: Remove curbs on foreign investment in rupee debt

Move experts say would help the country's inclusion in benchmark debt indices and aid fund flows of at least $10 bn

A study by a research group under the Securities and Exchange Board of India (Sebi) has recommended the removal of all restrictions on foreign investments in government and corporate debt, a move which experts say would help the country’s inclusion in benchmark debt indices and aid fund flows to the tune of $10 billion.

“Even though there is foreign appetite for rupee-denominated debt, India has placed many restrictions on foreign investment in rupee-denominated bonds. These include caps on the total as well as limits by investor class, maturity and issuer and have been implemented through a complicated mechanism for allocation and reinvestment,” noted the report authored by Ila Patnaik, Sarat Malik, Radhika Pandey and Prateek of the Sebi Development Research Group (DRG).

The report added its views did not necessarily reflect that of the regulator.

It said currently, there were different limits for foreign investments in government bonds and corporate bonds, an arrangement further complicated by having sub-limits across assets and investor classes.

It recommended that restrictions on ownership, if required, should be in the nature of percentage limits on foreign ownership as is seen in equity markets.

“Foreign ownership should be capped at a certain percentage of the outstanding government debt, such as at 10 or 15 per cent of the total government debt. Under this framework, the government debt market should be made operationally similar to the equity market,” it said.

It also agreed with a recommendation made in the 2013 Union Budget statement on easing access of foreign investors to the onshore currency market.

It has also suggested the inclusion of unlisted corporations and alternative investment funds as users of credit default swaps, as well as allowing credit default swaps on unrated bonds and loans.

Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities, said the move would increase liquidity coming into Indian markets. “These measures will help attract more capital and these measures are also favourable for bringing India towards inclusion in bond indices that exist globally.”