MUMBAI, July 26: Notwithstanding the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) permission to the foreign institutional investors (FIIs) to invest in government securities (Gilts) in March this year, the 100 per cent debt funds have so far been averse to the Gilts.

FIIs, registered as 100 per cent debt funds with the SEBI, had invested upto US dollars 106.6 million in India with the whole chunk going to corporate debt completely evading government securities.

Amidst much fanfare and with an intent to develop the secondary debt market in India, the RBI and SEBI had decided to allow FIIs into government securities. They were, however, kept out of treasury bills market.

Global big names like Templeton, Peregrine, HSBC, Credit Swiss Investment Management, Citicorp Investbank, UBS and Allinace are registered as 100 per cent debt funds. The RBI today issued a circular again after five months listing out the guidelines for FII investment in Gilts.

According to the Reserve Bank, FII investment in Gilt securities should only be through banks authorised by RBI to act as bankers to FIIs having SGL (statutory general ledger) account and current account with it. FIIs are allowed in secondary as well as primary markets and the transaction in the former would be through delivery versus payment.

Asked on the reasons for FII aversion to government securities, an FII source said the debt funds were waiting for greater development of the market and volumes to become larger.

``Even the withholding tax of 20 per cent acts as a hurdle, which brings down the yields considerably,'' the source said.

Fixed-income market researchers said the interest rates were low in the government securities and the volumes had been low. ``The recent auctions have shown that the volumes might be just right for the FIIs to start investing,'' they said. FIIs always expect allotment, therefore the auction system in the primary market does not suit them.

However, FII investment in the stock markets has been going up. Net FII investments in 1997 have been increasing since March. Cumulative net investment by FIIs in the markets have gone up to $ 8.377 billion as on July 9, 1997.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.