To encourage greater participation by foreign institutional investors (FIIs) in Government bonds, a SEBI Research study done along with National Institute of Public Finance and Policy has said that quantitative restrictions on foreign investment in Government bonds should go.

Being rupee denominated, concerns of liabilities being denominated in dollars do not arise, it added.

Currently, the overall FII limit on G-Secs is $30 billion. However, FIIs owned only 1.6 per cent of the total Government bonds outstanding or $11 billion as on March 31, it added.

The report suggested imposition of percentage limits for capping FII investments in Government paper such as 10 or 15 per cent of the total Government debt for greater foreign participation.

Free investments till the prescribed limit should be allowed and daily dissemination of utilised levels would address the issue of bidding for higher limits and the presence of large unutilised limits in the market.

Once the limit is reached, the investors can acquire Government bonds in the secondary market.

This will help ease the frictions associated with the current auction system, said the report.

Annul differences

The report advocated doing away with differences between asset classes and sub-limits for treasury bills. It also seeks not to distinguish between investor classes — FIIs, QFIs, Sovereign Wealth Funds and the like.

It has also backed the simplification of KYC regime and avoiding sudden changes in market structure.

It also sought to strengthen liquidity by allowing FIIs to hedge their rupee transactions using currency futures and options besides allowing unlisted corporates and alternative investment funds as users of credit default swaps.

It mooted credit default swaps on unrated bonds and loans and has recommended clarity on tax regime for foreign asset managers who build offices in India.

>raghavendrarao.k@thehindu.co.in

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