Sebi had on Friday decided to do away with the conditions limiting FIIs’ allocation of funds between debt and equity to provide greater flexibility and investment options to overseas investors.

“Accordingly, it has been decided, to dispense with the existing provisions under Fema regulations, restricting an FII’s allocation of its total investment between equity and debt in the ratio of 70:30,” the Reserve Bank of India said in a notification here.

Sebi had done away with the existing limit on distribution of FII investment a day after the government doubled the cap on their investment in corporate debt to $6 billion. The decision came in the wake of FIIs pulling out of the Indian equity market and pumping money in the debt market. FIIs have taken out US$11.56 billion from equity market and bought net debt worth US$1.8 billion since January. However, another regulation that FIIs investing up to 100 per cent in the debt market will have to form a 100 per cent fund for this purpose and get it registered with Sebi remains, the central bank said.

Security reciepts

So far as security receipts issued by the Asset Reconstruction Companies (ARCs) are concerned, the total holding of a single FII in each tranche of scheme must not exceed 10 per cent of the issue.

Besides, the total holding of all FIIs put together must not exceed 49 per cent of the paid up value of each tranche of scheme of security receipts issued by ARCs.

The relaxation, according to Sebi, is aimed at according “greater flexibility to the FIIs to allocate investments across equity and debt.”

“It will have a two-way positive impact. This will enable FIIs to invest without any obligation and will also enable Indian companies to get more funds for their expansion plans,” observed Nexgen Capital Equity Head Jagannadham     Thunuguntla.

Corporate debts

The move comes a day after government doubled the limit of FII investment in corporate debts to US$6 billion.
Finance Minister P Chidambaram, on Friday, said “Sebi had informed me that it would address any request for relaxation in the proportion of investment in equity and debt required to be maintained by an FII under current regulations.”

Sebi said the enhanced limit for investment in corporate debts will be allocated among the FIIs on a “first come first served” basis up to a ceiling of US$300 million per entity.

To encourage inflow of foreign capital, Sebi has already lifted restrictions on Participatory Notes (PNs) and restored pre-October 2007 position. Sebi is also expected to come out with a discussion paper on entire structure of the FIIs in the country.