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In a move to control forex inflows, the government has placed a ceiling of $1bn for investment by foreign institutional investors (FIIs) in debt - government securities, treasury bills and corporate bonds, for '03-04.

The government had come out with the same ceiling for '02-03, but had not finalised the limit for this fiscal. FIIs invest funds in the domestic bond market either as 100% debt funds or under the 70:30 route.

The second category of FIIs are equity oriented FIIs, which can put up to 30% of their investments in the country in debt. The government has capped debt investments under the 70:30 route at $100m.

"Further investments shall be subject to availability of head-room under this route," said a release from the Securities & Exchange Board of India (Sebi). For debt funds, the cap is $900m. Sebi assigns sub-limits within the overall ceiling to individual 100% debt FIIs.

As a result of setting a cap of $900m, these individual limits earlier allocated for 100% debt funds stand non-operative and will be realigned based on the capped limit. "The revised limits will be advised to the 100% debt funds separately," said Sebi.
FIIs have been major buyers of bonds during the calendar year '04. They have so far invested over $400m in debt.

The outstanding investments in debt are understood to be close to $1.5bn, the ceiling since the government first capped FII investments in debt in '96.
Sebi said that any unutilised limit for individual FIIs shall not be available for investment until fresh limits are allocated to them. "Further investments and roll-over of existing positions shall be permissible, subject to availability of limits under the re-aligned limits," said Sebi.

FIIs recently bought $200m of corporate bonds. For a long time, FIIs primarily invested in treasury bills. Since the tenor of T-bills is up to one year, FIIs use the redemption proceeds for buying fresh bonds.

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