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November 29, 2011
Fresh debt allocation to institutional investors up
for bid
SEBI has vide its recent circular1 announced an increase in the current limit for debt
investments by Foreign Institutional Investors (“FII”). The increased
debt limits shall be allocated to FIIs and sub-accounts in an open bidding
platform on the Bombay Stock Exchange (BSE) on November 30, 2011. The
increased debt limits seem timely as the government seeks to attract capital
inflows amid rising yields and volatility in the domestic debt market.
INTRODUCTION
Volatility
in the equity markets and attractive opportunities in debt segment makes a
very compelling case for the investors to revisit their asset allocation with
a bias towards debt. Further, given the recent unprecedented decline in
Indian rupee, it was quite timely for the government to enhance the limits
for corporate debt and in government securities by US$ 5 billion each. The
enhanced cap for FII investments would now be at US$ 15 billion for
government securities and US$ 20 billion for corporate debt.
KEY
ASPECTS
-
The time period for utilization of the limits
allocated for the corporate debt through bidding process is to be 90 days.
The time limit for utilizing government debt shall be 45 days. The time
period for replacing the disposed off/matured debt instrument/ position
acquire under the successful allocation, is 15 working days in case of
corporate debt and 5 working days in case of government debt instruments.
-
The minimum amount which can be bid for is Rs 1 crore
(approx. US$ 200,000). This is a significant reduction from the erstwhile
minimum amount of Rs 250 crores (approx. US$ 50 million). The move could be
to ensure larger participation in the debt allocation through the bidding
platform. Amounts below the above thresholds could be allocated under the
‘first come first served basis’.
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Under the bidding process, no single entity would be
allocated more than Rs 2000 crore (approx. US$ 400 million) of the investment
limit. The limit earlier was Rs 10,000 crore (approx. US$ 2 billion). The
reduction in individual limits could be to ensure broad-basing the investors.
Interestingly, no residuary period for holding (i.e. maturity period) have
been prescribed in respect of the debt instruments acquired under these
allocations.
-
Price of the bid: The price for each successful bid
allocation is a minimum flat fee of Rs 1000 or bid price whichever is higher.
The bid price for corporate bonds are sharply higher than what is commanded
for government securities and ranged between 105 basis points to 140 basis
points during the last round of the auctions conducted earlier this year in
March.
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There shall also be bidding on the unutilized limits
for FII participation in long term government debt with no entity being
allowed to be allocated more than Rs 200 crore (approx. US$ 40 million) of
the investment limit.
REMARKS
SEBI’s
move to enhance the debt limits for FII participation seems to underpin debt
as a preferred asset class for institutional investors given these turbulent
times in secondary markets for equity. Quite indicative of the institutional
appetite for Indian debt products, the last round of the auctions conducted earlier this year
in March saw the FIIs highly oversubscribe the debt allocations on offer. The move also seems to be the
regulator’s response towards mobilizing capital and is reflective of its
endeavour to develop a secondary debt market in India. The policy also allows
the domestic companies to access rupee denominated debt from foreign sources.
This is all the more critical as the costs for accessing domestic debt have
gone up prohibitively. Separately, SEBI’s shift to smaller ticket sizes for
debt allocation would also ensure wider participation in the debt market
reducing costs for the participants in turn.
________________
1 CIR/IMD/FIIC/20/2011
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Richie Sancheti and Siddharth Shah
You can direct your queries or
comments to the authors
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