Market regulator SEBI today allowed foreign investors to invest directly in the debt market, by doing way with the auction process.In a circular Securities and Exchange Board of India said that “it has been decided that FIIs/QFIs can now invest in government debt without purchasing debt limits till the overall investment reaches 90 per cent after which the auction mechanism shall be initiated for allocation of the remaining limits, as currently in place for FII investments in corporate debt.”
With the relaxation, the auction mechanism kicks in only for the remaining 10 per cent limit. It will be identical to the procedure followed for corporate debt.
SEBI said that all restrictions on re-investment in Government debt have been done away with till the limits are available.
FIIs can invest a maximum of $30 billion in Government debt, of which, $5 billion is earmarked for sovereign wealth funds, multilateral agencies, endowment funds, insurance funds, pension funds and foreign central banks.
As on September 12, against a total limit of $25 billion for Government debt, FIIs had invested $22.07 billion or 88.28 per cent. Of the additional limit of $5 billion reserved for sovereign wealth funds and others, only 10.38 per cent or $519 million has been utilised.
FII investment in corporate bonds was 32.73 per cent of the $51-billion limit or $16.69 billion.
Overall, FIIs have invested only 48.46 per cent ($39.28 billion), against their allocated limit of $81 billion in the debt market.
DvP-3
SEBI has also introduced DvP-3 (delivery versus payment-3) mode of settling trades in corporate bonds.
Payment for bonds, between buyers and sellers, is usually settled in three different methods – DvP-1, DvP-2 and DvP-3.
Under DvP1, pay-in and payout of funds as well as securities are done transaction-by-transaction.
Under DvP2, the funds are settled on a net basis (payments minus receipts), while securities are settled on a transaction-by-transaction basis.
Under DvP-3, funds and securities are settled on a net basis. For securities the net is arrived at by subtracting the quantity of sale from purchase.
SEBI has also included the risk management procedures for DvP-3 settlement in corporate bonds based on its discussions with the stock exchanges.