Clarification on Government Debt Investment Limits

The gov­ern­ment is like­ly to expand the scope of Served from India Scheme (SFIS) by allow­ing exporters to trade the tax incen­tives earned by them in a bid to spur ser­vices exports.

The incen­tives are in the form of duty cred­it scrips that can be used to pay the cus­toms duty on input imports of cap­i­tal goods or consumables.

If the incen­tives are made trad­able, exporters from sec­tors such as edu­ca­tion, health­care, health­care, con­sul­tan­cy and real estate that do not import much will be able to sell them in

“We are try­ing to broad­en the scope of SFIS. The issue is that most sec­tors are not able to utilise the scheme as there are many con­di­tions attached. There­fore they should be allowed to sell it in the mar­ket. It will be a great relief for the exporters,” said a gov­ern­ment official.

The five-year for­eign trade pol­i­cy is set to be announced in the next two weeks, with the gov­ern­ment like­ly to set an export tar­get of $650–700 bil­lion by 2019.

At present, duty cred­it scrips equiv­a­lent to 10 per cent of free for­eign exchange earned are issued on actu­al user basis. “Main­ly hotels and tour oper­a­tors take advan­tage of the scheme right now. But­what about the rest? Efforts are on from our side to allow exporters to give it to some­one else,” said the offi­cial, who did not wish to be named. The gov­ern­ment will also make SFIS scrips adjustable against 12 per cent ser­vice tax, besides increas­ing the over­all amount of the scheme.

Indi­a’s ser­vices exports stand at about $145 bil­lion, half of the mer­chan­dise exports of over $300 bil­lion. The rev­enue out­go under SFIS was Rs 1,000 crore in 2013–14. Once the scrips become trade­able, the out­go will expand tremendously.

To avoid that, the gov­ern­ment will lim­it the scheme to a few sec­tors. “The move will give a leg up to the ser­vices exports. Since the scheme can only be used for cap­i­tal goods imports and con­sum­ables, it has a very lim­it­ed scope,” said Ajay Sahai, direc­tor gen­er­al and CEO of the Fed­er­a­tion of Indi­an Export Organ­i­sa­tions (FIEO).

The gov­ern­ment may also prune the exist­ing pro­mo­tion­al schemes for mer­chan­dise exports like ‘focus prod­ucts’ and ‘focus mar­ket’, while giv­ing a big push to brand­ing ini­tia­tives. “We will be tar­get­ing only spe­cif­ic mar­kets, which will improve Indi­a’s com­pet­i­tive­ness where it is required, result­ing in high­er ship­ments,” said the official.

The share of exports to focus mar­ket coun­tries in total exports rose from 6.72 per cent in 2009-10 to 8.32 per cent in 2012–13, as per a study by FIEO. Indi­a’s share in Chi­na’s imports fell from 1.02 per cent to 0.74 per cent between 2005 and 2012. How­ev­er, the coun­try’s share in top import­ing nations of $100 bil­lion and above grew mar­gin­al­ly from 1.33 per cent to 1.49 per cent between 2009-10 and 2012–13, accord­ing to FIEO.

1. SEBI had issued a cir­cu­lar CIR/IMD/FIIC/ 17/2014 dat­ed July 23, 2014 where­by the investment

lim­it in gov­ern­ment secu­ri­ties avail­able to all FPIs was enhanced by USD 5 bil­lion by

cor­re­spond­ing­ly reduc­ing the amount avail­able to long term FPIs from USD 10 bil­lion to USD 5

bil­lion with­in the over­all lim­it of USD 30 bil­lion. It was also stat­ed in the afore­said cir­cu­lar that

all future invest­ments in this USD 25 bil­lion debt lim­it shall be required to be made in

gov­ern­ment bonds with a min­i­mum resid­ual matu­ri­ty of three years.

2. It is clar­i­fied that all invest­ments by Long Term FPIs (Sov­er­eign Wealth Funds (SWFs),

Mul­ti­lat­er­al Agen­cies, Endow­ment Funds, Insur­ance Funds, Pen­sion Funds and Foreign

Cen­tral Banks) in the USD 5 bil­lion Gov­ern­ment debt lim­it shall con­tin­ue to be made in

Gov­ern­ment bonds hav­ing a min­i­mum resid­ual matu­ri­ty of 1 year.

3. Accord­ing­ly, the Gov­ern­ment debt invest­ment lim­its shall be as follows :

S.No.	Type of limit	Cap(US$ bn)	Cap(INR Crore)	Eli­gi­ble Investors	Remarks
1	Gov­ern­ment­Debt	25	124,432	FPI’s	Avail­able on demand. Thein­cre­men­tal investment lim­it of USD 5 bil­lion (INR 24,886 cr) shall be required to be invest­ed in gov­ern­ment bonds with a min­i­mum resid­ual maturity of three years. Fur­ther, all future invest­ment against the lim­it vacat­ed when the cur­rent invest­ment by an FPI runs off either through sale or redemp­tion shall also be required to be made in gov­ern­ment bonds with a min­i­mum resid­ual matu­ri­ty of three years.
3	Gov­ern­ment­Debt – Long Term	5	29,137	FPIs which arereg­is­tered with SEBI under the categories of Sov­er­eign Wealth Funds (SWFs), Mul­ti­lat­er­al Agencies, Endow­ment Funds, Insur­ance Funds, Pen­sion Funds and For­eign Cen­tral Banks	Avail­able on demand.Eligible investors may invest only in dated secu­ri­ties of residual matu­ri­ty of one year and above.

4. In accor­dance with SEBI cir­cu­lar CIR/IMD/FIIC/15/2013 dat­ed Sep­tem­ber 13, 2013, FPIs shall

be per­mit­ted to invest in the USD 25 bil­lion Gov­ern­ment debt lim­it till the over­all investment

reach­es 90% after which the auc­tion mech­a­nism would be ini­ti­at­ed for allo­ca­tion of the

remain­ing limits.

5. In the event the over­all FPI invest­ment exceeds 90% in either of the debt lim­it cat­e­gories (as

indi­cat­ed by the debt util­i­sa­tion sta­tus updat­ed dai­ly on the web­sites of NSDL and CDSL), the

fol­low­ing pro­ce­dure shall be followed:

1. The depos­i­to­ries (NSDL and CDSL) shall direct the DDPs to halt all FPI pur­chas­es in debt

secu­ri­ties in that category

1. The depos­i­to­ries shall then inform NSE (since the last auc­tion was held on BSE)

regard­ing the unutilised debt lim­its for con­duct of auc­tion. Upon receipt of information

from the depos­i­to­ries, NSE shall con­duct an auc­tion for the allo­ca­tion of unutilised debt

lim­its on the sec­ond work­ing day

1. The auc­tion would be held only if the free lim­it is greater than or equal to INR 100 cr.

The auc­tion shall be con­duct­ed in the fol­low­ing manner :

Par­tic­u­lars :

Dura­tion of bid­ding: 2 hours (15:30 to 17:30 hrs)

Access to plat­form-  Trad­ing mem­bers or custodians

Min­i­mum bid-  INR 1 crore

Max­i­mum bid-  One-tenth of free lim­it being auctioned

Par­tic­u­lars :

Tick Size-  INR 1 crore

Allo­ca­tion Method­ol­o­gy — Price time priority

Pric­ing of bid- Min­i­mum flat fee of INR 1000 or bid price whichev­er is higher

Time peri­od for uti­liza­tion of the lim­its- 15 days from the date of allocation

1. Once the lim­its have been auc­tioned, the FPIs will have an util­i­sa­tion peri­od of 15 days

with­in which they have to make the invest­ments. The lim­its not utilised with­in this

peri­od would come back to the pool of free limits.

1. Upon sale/redemption of debt secu­ri­ties, the FPI will have a re-invest­ment peri­od 5

days. If the rein­vest­ment is not made with­in 5 work­ing days, then the lim­its shall come

back to the pool of free limits.

1. The sub­se­quent auc­tion would be held 20 days after the pre­vi­ous auc­tion, sub­ject to the

ful­fil­ment of the con­di­tion men­tioned at Point © above. The auc­tion mech­a­nism shall

be dis­con­tin­ued and the lim­its shall be once again avail­able for invest­ment on tap when

the debt lim­it util­i­sa­tion falls below 85%.

1. In order to pro­vide oper­a­tional flex­i­bil­i­ty to FPIs, it is clar­i­fied that there would be no

oth­er re-invest­ment restrictions

This cir­cu­lar shall come into effect imme­di­ate­ly. This cir­cu­lar is issued in exer­cise of powers

con­ferred under Sec­tion 11 (1) of the Secu­ri­ties and Exchange Board of India Act, 1992.

A copy of this cir­cu­lar is avail­able at the web page “Cir­cu­lars” on our web­site www.sebi.gov.in.

Cus­to­di­ans are request­ed to bring the con­tents of this cir­cu­lar to the notice of their FPI clients.