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Thursday, Dec 09, 2004

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A needless ceiling

ALLOWING FOREIGN INSTITUTIONAL investors to put money in corporate debt paper is welcome, even if does not go far enough. For a start, the aggregate outstanding investment of $500 million in such instruments is too small to be a significant source of capital, considering that the balance-sheet of the listed corporate sector should be at least 300 times this ceiling. Nor is there going to be a fundamental shift in the level of secondary market activity in such instruments. There is, thus, a case for substantial liberalisation on this count.

The present policy confers considerable freedom on domestic enterprises to make a direct pitch for foreign capital with qualified institutional investors abroad. There is an `automatic approval' route for small-ticket offerings by domestic enterprises and also for those engaged in putting up infrastructure projects. Then there are special schemes for financial institutions that would funnel the monies raised as ECBs (external commercial borrowings) to domestic borrowers for modernisation of their production infrastructure. Further, with specific government approval, domestic enterprises can raise large sums of money, often equivalent to the present ceiling on secondary market investments by registered FIIs. If there is full freedom for overseas money to pick up domestic corporate assets, there is really little justification for a highly regulated access for foreign funds coming in indirectly, through the capital market. Yet, that is what the present policy seeks to do.

If anything, the Government should actually encourage these institutions to invest through this route as their presence together with `debt' mutual funds could create a vibrant secondary market in corporate paper and, in time, the phenomenon may also attract the retail domestic investor. The presence of more secondary market players for corporate paper may also help uncover information about the fundamentals of domestic enterprises, which should help create a superior culture of corporate governance. Then there is the dichotomy between investments in equity and debt instruments. While registered FIIs have considerable latitude in investing in domestic corporate equity, the present policy considerably limits them vis--vis debt instruments. The irony is that the Indian corporate sector is under-leveraged, because of the massive mobilisation of equity during the boom years of the 1990s. The need now is for greater debt component to the capital structure, and more freedom to the FIIs to invest in corporate debt would aid the process.

This is not to suggest that there is no case for caution on the flow of short-term money into the domestic economy. After the 1997 East Asian crisis, this is well recognised globally. But the country's external sector presents a far healthier look than at any time in the past. In any case, this requires an integrated approach covering all possible means by which foreign capital can enter rather than play favourites where monies directly raised abroad are vested with greater merit than those mobilised indirectly.

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