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Sunday, Dec 19, 2004

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SEBI panel for lifting FII cap on corporate bonds

Richa Sharma

Mumbai , Dec. 18

THE SEBI committee has suggested lifting of the existing $500-million ceiling on FII investments in corporate bonds as a measure to increase liquidity in the market. Instead, it has mooted a lock-in period for FII investment in corporate bonds.

The committee, which has submitted its report recently, is of the view that introducing a lock-in period, say of three years, would be better to prevent sudden flight of foreign capital rather than blocking the inflow of such capital. Alternatively, the committee has recommended a larger withholding tax on FII investment in corporate bonds.

To deepen the liquidity in the corporate bond market, the committee, chaired by Mr Pradeep Madhav, Executive Vice-President, IDBI Capital Market Services, has recommended that Provident Funds and Pension Funds compulsorily invest at least 10 per cent of their funds in private sector bonds.

It has also suggested that market-making function, essential to the government securities market, should be introduced in the case of corporate bonds. Primary dealers should be given incentives to perform market-making functions in corporate bond portfolios, such as access to call market for funding investments in corporate bonds, said a member of the committee.

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