January 10, 2012
SEBI Strips FIIs of Re-Investment Facility in Debt
record:tt_news:1104The Securities Exchange Board of India (“SEBI”) vide Circular No. CIR/IMD/FIIC/1/2012 dated January 3, 2012 (“Circular”) has done away with the facility of reinvestment of the corporate debt limits available with the foreign institutional investors (“FIIs”) leaving the FIIs who had acquired debt investment limits high and dry, especially those FIIs who had recently purchased these limits in pursuance of SEBI Circular No. CIR/IMD/FIIC/20/2011 dated November 18, 2011 (“Circular 20”).
For an FII to invest in corporate debt or debt securities, the FII first needs to acquire debt allocation limits to be able to invest in debt securities. These debt limits are issued or auctioned by the SEBI from time to time. Fresh limits aggregating to USD 5 billion were recently auctioned by SEBI on November 30, 2011 vide Circular 20 which has been discussed in detail in our hotline titled “Fresh Debt Allocation to Institutional Investors up for Bid.”
Earlier once these investment limits were obtained and utilized by an FII i.e. once the FII had invested into or purchased debt securities within the subscribed limits, the FII had a period of five business days for replacement of disposed off/matured debt instruments, as per Circular No. IMD/FII&C/30/2008 dated July 4, 2008 of SEBI. This period was increased from five business days to fifteen business days by SEBI vide Circular No. CIR/IMD/FIIC/18/2010 dated November 26, 2010. Hence, previously an FII which had acquired or obtained investment limits from SEBI, had the flexibility to reinvest into debt securities after the initial investment had been sold off or had matured, provided the subsequent investment was made within 15 business days of such sale or maturity of the earlier investment.
To the disappointment of FIIs that had purchased such debt limits with a long term debt strategy in mind, the Circular has withdrawn the facility of re-investment by the FIIs by providing that the debt limits acquired henceforth by an FII shall expire upon the redemption or sale of debt securities, with certain leeway for FIIs that have already acquired debt limits.
The Circular deals with corporate and infra debt and has brought in the following changes:
In respect of Corporate debt:
Fresh Investments: The debt limits being acquired henceforth by an FII shall expire on sale or maturity of the debt investments and the FII would be required to obtain the limits again through the bidding process or first come first serve basis.
FIIs which already have acquired limits: As per the Circular, the FIIs that have already obtained the debt limits from SEBI and / or invested in debt would continue to have the reinvestment facility i.e. they may re-invest into debt securities within 15 business days of the sale or redemption of the earlier investments, until the occurrence of any of the following conditions:
Once any of the above conditions is met, the reinvestment facilities available to the FIIs would cease to exist and the FII would be required to obtain fresh limits to make any further investments into debt. However, it is clarified that if an FII holds certain debt investments acquired prior to the occurrence of any of the above conditions, it is not obligated to sell such investments upon the occurrence of any of the above conditions, and may continue to hold such investments till the sale or redemption thereof.
LONG TERM INFRA DEBT CATEGORY
According to SEBI Circular No. IMD/FII&C/18/2010 dated November 26, 2010, infra debt category is where the FII invests into debt securities of infrastructure companies i.e. the companies engaged in the infrastructure sector as per the external commercial borrowings policy1. The investments made by a FII under infra debt category are subject to either (i) three years lock-in with a residual maturity of minimum three years or (ii) a one year lock–in with a residual maturity of minimum one year, depending upon the nature of the limit obtained by the FII. During such lock-in period, an FII can sell its investments only to another FII and not to a domestic entity.
The changes introduced by the Circular for investments in infra debt category is as follows:
Beginning this year, the FIIs have suffered a double blow. On the equity front, the government had recently proposed to allow qualified foreign investors (“QFI”) direct access to the Indian equities market as an alternative to the FII route, which as mentioned in our hotline titled “Welcome QFIs: A New Entry Route To Capital Markets For Foreign Investors”, could adversely affect the attractiveness of FIIs. And now, with the withdrawal of re-investment facilities, the FIIs have suffered a major setback even on the debt front.
With SEBI changing the rules of the game midway, the FIIs who had already acquired the debt limits and were planning to use it over a relatively longer horizon will now be handicapped to do so. The Circular is likely to be a larger disappointment for FIIs that had very recently acquired their debt limits on November 30, 2011 at a premium as high as 125 basis points based on their ability to invest and reinvest in debt markets over a longer horizon.
Whilst the Circular is likely to be welcomed by a host of FIIs that were unable to procure debt limits in the auctions earlier, the move may not go well with the sentiments of FIIs that had acquired the debt limits at a premium and organized themselves on the premise of a definite long term strategy.
1 As per paragraph (v)(a) of the Part I of the Master Circular No.9 /2011-12 (Master Circular on External Commercial Borrowings and Trade Credits) dated July 1, 2011, Infrastructure sector is defined as “(i) power, (ii) telecommunication, (iii) railways, (iv) roads including bridges, (v) sea port and airport, (vi) industrial parks, (vii) urban infrastructure (water supply, sanitation and sewage projects), (viii) mining, exploration and refining and (ix) cold storage or cold room facility, including for farm level pre-cooling, for preservation or storage of agricultural and allied produce, marine products and meat.”