Sebi Removes Cap on Debt-Equity Investment Ratio for FIIS

SEBI has removed the restriction of the 70:30 ratio of investment in Indian equity and debt by FIIs. The removal is with immediate effect, said a statement from SEBI on Thursday. The necessary amendments to the regulations will be made in due course.This is to give flexibility to the FIIs to help avail themselves of the increased cumulative debt investment limit of $6 billion in corporate debt that was announced on Wednesday. The earlier cap had been $3 billion.

The corporate debt shall be allocated to the FIIs on a first come first served basis, subject to a ceiling of US 300 million per registered entity.

SEBI on Thursday said FIIs would have to report the quantity of Indian securities lent overseas that would have the effect of a short sale in the Indian market.

It is now clear what SEBI intended when it announced on Wednesday that FIIs and sub-accounts would have to submit these details, said legal experts on regulatory matters.

“For the purpose, the FIIs and sub-accounts are required to submit information about the quantity of securities which they have lent to entities other than the Indian securities market i.e., where the Overseas Derivative Instruments (ODIs) are issued — which has the effect of a short sale in the Indian security (including F&O)/synthetic shorts,” said SEBI’s circular issued on Thursday.

FIIs are required to submit this information on a daily basis on a dedicated email ID provided by SEBI, which will collate them and upload the consolidated figures on its Web site twice a week, Tuesdays and Fridays.

A legal expert with knowledge of FII activity explained it this way: “FIIs lend securities to a foreign entity either directly or through the P-note (ODI) route. The persons borrowing these ask FIIs to sell them after having borrowed them. They tell the FIIs that they will make good the securities after some time. This is a way of short selling. The government wants to study this to see whether such short selling is affecting the Indian market.”

FIIs have been net sellers of Indian equity for over $11 billion in 2008 so far. The government is keen to stem this outflow to prevent Indian stocks from tanking further.