Regulators to discuss FII role in IDRs

Private placement of NCDs may also be on HLCC’s agenda.

The Reserve Bank of India (RBI) is in favour of a long-term relaxation in the foreign investment policy rather than short-term tinkering.

Given the dollar crunch overseas and declining foreign exchange reserves, the central bank is not in favour of allowing foreign institutional investment (FII) in Indian depository receipts (IDRs) at this point of time. Official sources said it was not the right time to allow FII participation in IDRs since dollar outflows were much more than inflows. However, they clarified that fundamentally there was nothing wrong in the proposal.

However, the Securities and Exchange Board of India (Sebi) is pressing for FII participation to increase liquidity in the instrument and get foreign companies listed on Indians stock exchanges. This is one of the various issues that may come up for discussion at the meeting of the High-Level Coordination Committee on Capital Markets (HLCC) in New Delhi on December 22.

Among other issues, the investment limit for foreign investors in the debt market may be hiked, which currently is capped at $6 billion, including government securities and corporate debt, according to sources. In this case too, the government and Sebi want unlimited access to FIIs in the debt market. However, RBI has vehemently rejected the idea, stating that it will sharply increase the proportion of the short-term debt component, which is highly risky at this point of time.

IDRs, introduced in 2004, are Indian counterparts of global depository receipts (GDRs), enabling foreign companies to raise money from the Indian markets. Sebi wants FII participation, along that of non-resident Indians (NRIs), in the qualified institutional placement (QIP) category.

Another important issue that may figure at the meeting is the regulation of private placement of non-convertible debentures (NCDs) or commercial papers ( CPs) of less than one-year tenure by non-banking finance companies (NBFCs) with other parties to raise short-term finance. RBI wants Sebi to start regulating the segment since the entire segment is currently unregulated.

While around Rs 3,000-5,000 crore of CPs get placed in the market every fortnight, the total outstanding amount of CPs in the market at any given point of time work out to around Rs 45,000 crore, said market dealers.

Sebi currently regulates private placements of securities with a tenure of one year or more.

Further, there is a proposal to relax the private placement of debt by companies. However, sources said it will take time since it requires an amendment to the Companies Act.