What changed
The RBI has dispensed with the requirement that FIIs maintain a 70:30 ratio between equity and debt investments, as previously mandated under FEMA regulations. This change follows SEBI's removal of similar restrictions in its regulations. The existing caps on FII holdings in security receipts issued by Asset Reconstruction Companies remain unchanged.
What it means for you
Banks and lenders can expect increased FII participation in both equity and debt markets, as the removal of the ratio provides flexibility. This could lead to higher demand for government securities and corporate bonds, potentially lowering yields. However, the continued restrictions on security receipts may limit FII activity in the asset reconstruction space.
What you must do
- Update internal systems and advisory notes to reflect the removal of the 70:30 ratio for FII investments.
- Inform clients and customers about the new flexibility in FII allocation between equity and debt.
- Continue to monitor and enforce the unchanged limits on FII holdings in security receipts issued by Asset Reconstruction Companies.
Who it affects
Authorised Dealer Category – I banks, Foreign Institutional Investors (FIIs), Asset Reconstruction Companies (ARCs)
Does this circular remove all restrictions on FII debt investments?
No, it only removes the 70:30 ratio requirement. The limits on FII holdings in security receipts from Asset Reconstruction Companies (10% per FII, 49% aggregate) remain in place.
Do FIIs still need to register a 100% debt fund with SEBI for full debt investment?
The circular does not address this directly. The SEBI circular of October 16, 2008, which prompted this change, may have its own requirements; banks should refer to SEBI's guidelines for debt fund registration.
When did this circular take effect?
The circular was issued on October 17, 2008, and the changes were effective immediately upon issuance.