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Friday, Dec 03, 2004

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Govt puts $500-m cap on FII investments in corporate debt

Our Bureau

Mumbai , Dec. 2

PERHAPS jolted by the sudden surge in trading in commercial paper and corporate bonds over the past couple of days, the Finance Ministry on Thursday put a ceiling of $500 million on investments by foreign institutional investors (FII) in corporate debt.

"It has been further clarified by the Ministry of Finance that a cumulative sub-ceiling of the $500 million outstanding would be fixed on FII investments in corporate debt and this would be over and above the sub-ceiling of $1.75 billion for the Government debt under the overall ECB ceiling," a circular from the FII and Custodial Division of the Securities and Exchange Board of India said on Thursday.

The Ministry had only on Monday said that the overall ceiling of $1.75 billion on the FII investment in Government bonds and treasury bills did not apply to corporate debt; virtually allowing unlimited investment in corporate bonds and commercial paper (CP).

It had triggered a frenzy of CP buying on Tuesday and Wednesday, which, some say, was traders buying in anticipation of the FII demand.

Some traders believe that there was indeed a surge of FII buying.

Overall, a dealer with a top fund estimated, the trading volume in the corporate debt market would have been about Rs 3,500-4,000 crore.

Another trader said yields softened by about 60 basis points on the surge in demand.

However, they again hardened on Thursday after the Ministry announced the ceiling.

In the corporate bond market, debt maturing in about a year such as SBI 2006, BPCL 2006, PFC 2006, and Grasim 2006 was in good demand.

In the CP market, GE Finance and Citicorp Finance were favourites.

However, traders are divided over whether FIIs have already breached the $500 million ceiling or not.

One trader with a local broking firm said they have but some others were sceptical.

It is difficult to gauge the exact volume in this market because a lot of direct deals that remain private are struck.

The Indian rupee's gain over the US dollar offers a good arbitrage opportunity for foreign investors as even after paying for forward cover they stand to gain at least 150 to 200 basis points by investing in short-term debt here than elsewhere.

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