Foreign institutional investors (FIIs) will now have an individual ceiling of $200 million for investment in Indian debt securities.

The move is perceived, by many, to be an attempt to avoid concentration of risk in the debt market. Further, the Securities and Exchange Board of India (Sebi) ruled on Friday that the enhanced limits will be allocated to FIIs on a first-come-first-serve basis.

FIIs wishing to take advantage of the enhanced limit will have to make their applications to Sebi by June 16, 2008, and the first few entities to apply before the total cap of $8 billion is reached will be allocated the debt.

There are doubts over the exact impact of the move, especially since the existing limit also has not been utilised. Sebis move has come at a time when interest in government securities has waned resulting in the yield on 10-year bonds inching up to 8.25%.

Bonds have come under pressure, following fuel price hike and the governments decision to issue more oil bonds this year. But while the new limit may not have a short-term impact, market participants feel that it is a positive signal being sent out by the government and regulators.

Last week, the government had reviewed its external commercial borrowing policy and increased the FII limit in debt securities to a total of $8 billion, of which $5 billion would be for government securities and $3 billion for investment in corporate debt.

The earlier limit for FIIs in debt stood at $4.7 billion, of which $3.2 billion was allocated for government securities and $1.5 billion for investment in corporate debt.

Standard Chartered Bank managing director and regional head for global markets and South Asia Sundeep Bhandari said, "The ceiling Sebi has imposed on companies is probably an attempt to avoid concentration of risk, and broadbase the market. It is a good move by the regulator, as it will negate the volatility that could have been caused by a lesser number of investors pumping in large amounts."

The decision to increase foreign investment in debt securities comes at a time when the market is not doing too well. According Mr Bhandari, the timing could not be better, as it will attract investors with a long term view.

"If this move had come when the market was booming, it would have fuelled a number of speculative investors," he added.

A senior official at a bond house said, "The appetite for Indian debt securities from FIIs has not been high so far. Though the signals sent out by Sebi are clear, it remains to be seen how much of an impact it will have."

Incidentally, the corporate debt market has not performed too well over the past few months. There was only two new issues in the past month. The other two issues currently open, of Gammon India and Punjab State Electricity Board, have been kept open for a period of over two months due to a lack of investors.