The move is expected to smoothen the participation of FIIs in government securities trade, which at present is cumbersome. Till now, FIIs were allowed to invest in government securities only through the SGL account held by banks.

"In order to facilitate the custodial and depository services provided to FIIs in government securities, they will now be permitted to invest through SGL accounts of depositories such as NSDL and SHCIL, having both SGL account No ii (constituents account) and current account with the RBI subject to certain conditions," an RBI press release said on Thursday.

This will be in addition to the existing facility that FIIs have with the SGL accounts of banks.

SHCIL managing director BV Goud said that the RBI announcement is a welcome step. "We have been recommending RBI to make this change. We cater to about 36 FIIs and it will be easier for us offer this facility to our FII clients and make their own treasury management efficient," he said.

The FIIs will, however, have to follow certain conditions to avail of the transaction facility with custodians and depositories. "The settlement of payments due from the FIIs to SGL and current account holders is done through bank accounts maintained by them with their designated banks.

SGL and current account holders with the RBI shall not make their own funds available to FIIs for the purpose. All transactions put through SGL account and current account holders with the RBI should be governed by the delivery versus payment system of the Reserve Bank of India," the press release stated.

With the new facility available the FIIs are likely to take better advantage of investment facility in government securities. According to sources in foreign funds, the FII investment in government securities is essentially short term in nature, with the idea of parking funds in the intervals before exiting and entering equities market.

This would require easy mobility of funds and processes. This will now be possible with their custodians able to direct funds from equities to debt market with considerable ease. The FIIs have, so far, not been very active as long-term investors in the government debt market because of the continuing weakness of rupee and lower domestic interest rate regime.

The RBI had allowed FII investment in government securities market during the last one year. The investments, which was first restricted to the dedicated debt funds of FII was opened up later to 30 per cent of FIIs equity funds.