Re-investment facility withdrawn on new FII debt allocations

Those with existing limits/investments could avail of the facility till Jan 2, 2014.

The Securities and Exchange Board of India (Sebi) has decided to withdraw the re-investment facility for foreign institutional investors (FIIs) on new allocations of debt limit.

According to a circular issued on Tuesday, FII limits acquired during subsequent biddings would lapse on sale or redemption of debt investments at maturity. Earlier, FIIs could retain the limit even after maturity of a debt instrument, enabling them to re-invest in other debt securities.

“If, during the lock-in period, an FII decides to sell its holdings to another FII, the limit will also get transferred to the purchasing entity. However, if it decides to sell or redeem its holdings after the period, it shall lapse,” Sebi said in the statement.

FIIs with existing limits or investments would be able to avail the re-investment facility till January 2, 2014. However, the facility would be breached if the total sales made from their existing debt portfolio are twice the size of the debt portfolio, as on January 2, 2012.

According to experts, withdrawal of the facility would help FIIs which don’t have existing limits, as more debt limits will come for bidding. Meanwhile, the move will be disadvantageous for those with a greater investment limit, as their re-investment facility would be withdrawn and trading would be capped, they said.

“FIIs which entered the market early and cornered higher limits get higher returns, as they keep re-investing and trading their papers. This move will take away this advantage from them,” said Ajay Manglunia, head (fixed income), Edelweiss Securities.

Henceforth, all limits that lapse due to the redemption/sale of securities would be allocated to FIIs through a fresh bidding process.

On November 30, the regulator had auctioned enhanced debt limit worth $10 billion for FIIs. The auction was lapped up by the latter, with bids worth $14 billion.