| MUMBAI/NEW DELHI
MUMBAI/NEW DELHI Aug 13 India is considering
joining Euroclear, the world's largest securities settlement
system, with the condition that only long-term foreign investors
trade Indian government debt for now, two sources familiar with
the discussions told Reuters.
The proposal from the Reserve Bank of India (RBI) and
submitted to the finance ministry, allows long-term investors
such as sovereign wealth funds, to settle Indian government
bonds on it, but not yet foreign institutional investors (FIIs).
The discussions on Euroclear had halted in March ahead of
national elections. However, Finance Minister Arun Jaitley
announced in the federal budget last month the government would
be going ahead with listing Indian debt on Euroclear.
FIIs are the biggest foreign investors in India and the RBI
proposes their exclusion from settling government debt on
Euroclear be reviewed annually, one of the sources said.
Officials from the RBI, the finance ministry and the
Securities and Exchange Board of India (SEBI), which is the
capital markets regulator, will discuss the proposal on Tuesday,
the other source said.
The final decision rests with the finance ministry.
"If right at the start we restrict it to only long-term
players, probably the volatility will be much less in the
market," one source said. "There will not be much selling as the
long-term players purchase and they sit tight over a longer
period. So afterwards we will see how the market is reacting and
then we can open it to others."
The other source also said the initial aim was to test the
waters with a limited number of long-term investors.
"We want to see how this goes and the plan is to eventually
increase the allocation, allow corporate bonds, and include all
investor classes, but there has been no formal discussion on
that front yet," the source said.
The sources declined to be identified because the proposal
has not been publicised.
The recommendation to exclude FIIs signals the central
bank's skittishness about opening up India's debt market to
foreign investors given concerns about sudden destabilising
outflows. Last year, such outflows roiled the market and sent
the rupee to a record low.
Foreign investors have been calling for India to join
Euroclear because it makes it easier for them to access Indian
debt. It does this by removing some of the registration barriers
because the financial services company that books the trade,
usually a bank, settles and guarantees the trade.
Although India simplified its rules for foreign investors
earlier this year, it still imposes restrictions and
know-your-customer registration norms.
Under the proposal, long-term investors would be allowed to
settle bonds via Euroclear as long as the debt they purchase
does not exceed the $5 billion limit imposed on them.
India imposes an overall foreign ownership limit of $30
billion for foreign investors, of which the remaining $25
billion is geared for foreign institutional investors such as
Only 46.5 percent of the $5 billion quota for long-term
investors had been filled as of Wednesday, compared with 83
percent utilised by FIIs.
"The $5 billion is earmarked for long-term investors
already. The proposal is to allocate the unutilised portion of
this to Euroclear, so we expect about $2-$3 billion to start
with," said one of the sources.
(Additional reporting by Himank Sharma and Suvashree Dey
Choudhury in MUMBAI; Editing by Rafael Nam and Jacqueline Wong)