Sebi loosens investment norms to check FIIs’ Quit India movement

Foreign investors will now have investment freedom in Indian markets. With foreign institutional investors (FIIs) engaged in a ‘quit In...

Foreign investors will now have investment freedom in Indian markets. With foreign institutional investors (FIIs) engaged in a ‘quit India’ movement, the Securities and Exchange Board of India (Sebi) has decided to do away with the 70:30 ratio of FII investment in equity and debt respectively with immediate effect. This is expected to give the overseas investors more flexibility in taking investment decisions depending on the market situation. This move, along with the lifting of the curbs on participatory notes (PNs), is expected to result in more inflows in the long term.

The Sebi move has come after total FIIs’ total investment in listed Indian companies fell by 16.72 per cent from a high of $66.32 billion on December 31, 2007 to $ 55.23 billion on October 16, 2008. FIIs have pulled out $11.09 billion in 2008 as Indian markets joined the global meltdown triggered by the subprime and credit crises. A major reason for the 50 per cent fall in the Sensex this year is FII withdrawals.

The investment flexibility for FIIs follows the announcement by the government and the Sebi on Wednesday to increase in ceiling in FII investments in corporate debt from $3 billion to $6 billion. “In order to accord flexibility to the FIIs to allocate the investments across equity and debt, it has been decided to do away with the conditions provided in regulation 15(2) of Sebi FII regulations pertaining to restrictions of 70:30 ratio of investment in equity and debt respectively, with immediate effect. Necessary amendments to the FII Regulations will be carried out in due course,” Sebi said. The FIIs have already shown interest in the debt market and put $1.9 billion in 2008 while they pulled out $11 billion from equities. “In order to maintain the 70:30 ratio, FIIs are forced to sell debt whenever they sell equity. Now they will have flexibility and put their money wherever they want. Many FIIs had complained about this restriction earlier,” said a market source.

According to the Sebi, the relaxation is aimed at according “greater flexibility to the FIIs to allocate investments across equity and debt”. Henceforth, FIIs would not be required to follow the 70:30 equity-debt ratio.

Meanwhile, Sebi said the enhanced limit for investment in corporate debt will be allocated among the FIIs on a ‘first-come-first-served’ basis, subject to a ceiling of US $300 million per registered entity.