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The Opportunity

With the confidence of FIIs high in Indian capital markets and it being unlikely to wane due to saturation reached in US markets, a plethora of opportunities exist for overall development of Indian primary and secondary capital markets.

Currently, there are two instruments that FIIs can invest in India, i.e., equity and debt. The cap on FII debt investment varies from time to time between $1.0 billion and $1.5 billion. The Asset Reconstruction Company of India Ltd. (ARCIL), India's first asset reconstruction company, has vied for permitting FIIs to invest in a new instrument in India - distressed assets. ARCIL has made representations to SEBI, RBI and the Finance Ministry to allow FII investment in a new category, which is neither equity nor debt but a separate instrument - security receipts with underlying distressed assets.

The security receipts market or the junk bond market, as it is called in many developed and developing countries, works like this - A bank/FI sells a bad loan to ARCIL which floats a security receipt to represent it. These receipts can be subscribed to by investors such as FIIs and even be traded. In a year's time, ARCIL is slated to arrive at NAVs for these instruments. Earlier in the absence of FIIs as investors, the banks/FIs which sold the bad loans themselves were subscribing to the security receipts. This role could now be in turn taken up by FIIs.

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* Contributed by -
Ankit Chetan & Sudhanshu Duggal,
National Institute of Industrial Engineering (NITIE),
Mumbai.