On July 20, 2017 SEBI had issued a circular clarifying the auction process when the limit of foreign investments through Foreign Portfolio Investors (FPIs) in the corporate debt market exceeds 95% of the Combined Corporate Debt Limit (CCDL).

As per the procedure notified in the circular, if the utilization of CCDL exceeds 95%:

  1. The FPIs purchases in corporate debt securities are halted and BSE and NSE are informed.
  2. On the next day, an auction will be conducted alternately on BSE and NSE. The circular provides details of duration, size and pricing of the bid. A single FPI or group of FPIs cannot bid for more than 10% of the limits being auctioned.
  3. The auction shall be conducted only if the free limit is greater than Rs. 100 crores. However, if the limits stay below Rs. 100 crores (1 Billion) for 15 consecutive trading days, then auction shall happen on the 16th day.
  4. Post auction, if the limits aren’t used within 10 trading days, or if reinvestment is not done within 2 trading days post sale or redemption, then such limits shall come back into the pool of free limits.

If the utilization falls below 92%, the auction will be discontinued and limits shall be available again ‘on tap’. In such cases, the reinvestment facility is terminated and cannot be availed when the utilization exceeds 95% again.

Further, the circular temporarily restricts issuance of rupee denominated bonds in the overseas market until the utilization limit falls below 92%. As per the latest data, the FPIs have currently utilized 99.36% of CCDL. Issuers who have already received approval from RBI for masala bonds are left in a conundrum about the way to move forward.