FIIs may get more room to play in debt market

RBI, govt mull raising $500 mn cap in corporate bonds.

The cap on investment by foreign institutional investors (FIIs) in corporate debt may be raised.

The finance ministry, in consultation with the Reserve Bank of India, is considering raising the $500 million cap on FII investment in corporate bonds, sources said. However, the cap on FII investment in government papers is likely to remain unchanged at $1.75 billion.

In an attempt to increase FII inflows into the corporate debt market, the cap is likely to be hiked but with riders attached, sources in the know of the development pointed out.

Sources said corporate bonds will have to be rated by a credible rating agency if they are to be put up for FII investments. Moreover, these bonds will have to be listed.

Debt market investment by the FIIs got a boost in November 2004 year when the capital market watchdog, the Securities and Exchange Board of India (Sebi), exempted corporate bonds from the overall limit of $ 1.75 billion.

At that point, no limit was announced for FIIs' exposure to the corporate bond market. After two days, Sebi clarified that FIIs could not invest more than $500 million in corporate bonds.

According to banking sources, Sebi is believed to have suggested retaining the overall $1.75 billion cap but this should include instruments such as government securities, treasury bills as well as corporate debt. Therefore, hypothetically FIIs could choose to have the entire $2.25 billion of their investment in corporate debt.

But the RBI was of the view that investment in corporate debt should be segregated from the overall limit and capped at $500 million.

Bond age

• The cap on FII investment in government paper is likely to remain unchanged at $1.75 bn
• Corporate bonds must be rated by a credible rating agency if they are to be put up for FII investments. The bonds will have to be listed