FDI in primary dealership of debt instruments likely via auto route

NEW DELHI: Foreign direct investment (FDI) in companies engaged in primary dealership of commercial papers, security receipts, asset and mortgage-backed securities may soon be allowed through the automatic route. Foreign investors may also get automatic approval for undertaking dealerships of brokerage and underwriting services in government securities and corporate bonds, an official in the industry ministry said.

Currently, foreign companies have to take prior approval of the Foreign Investment Promotion Board (FIPB) for investing in these business activities. Under the automatic route, a foreign investor only informs the Reserve Bank of India before making an investment.

The change will be effected by including primary dealership activities under the head of non-banking finance company (NBFC) permitted under the automatic route, the official, who wished not to be named, said. India allows 100% foreign ownership in NBFCs.

NBFCs are engaged in the business of loans, purchase of securities, leasing, hire-purchase, insurance business and chit business. Unlike banks, they cannot accept demand deposits ��� funds deposited at a depository institution that are payable on demand, immediately, or within a very short period, like a savings bank account.

Last month, the FIPB cleared a proposal of Morgan Stanley Group for Morgan Stanley India Cap to act as an ���operating-cum-holding company��� and make downstream investments in primarily dealership activities. Two months ago, it had cleared a similar proposal of Goldman Sachs. If the proposal goes through, such firms would have an easy entry.

The system of primary dealers in the government securities market was introduced by the RBI in 1995 to strengthen the market infrastructure of government securities and put in place an improved, efficient secondary market trading system. This was to encourage holding of government securities on large scale and make the market more vibrant and liquid. In 2006-07, RBI gave banks the option to undertake primary dealership business departmentally.