## Tuesday, April 11, 2006

### Quota raj for debt inflows

As is well known, this year, the quantitative limits on FII investment into rupee debt (both government and corporate) have been raised.

Unfortunately, there's a highly bureaucratic mechanism through which the limit is operationalised. First, SEBI defines two "routes" called the "100% debt FII" and the "70:30 FII". Each of these has different rules. What is worse, it looks like SEBI has taken upon itself godlike powers in determining how much of the quantitative limit will be used by one type or the other. I'm sure the lobbying will now start where the "70:30 FIIs" will request an increase in their quota.

What is worse, within these quantitative limits, SEBI seems to want to `equitably' allocate the limit amongst all firms.

This is a really crazy idea. If you look at the ownership of shares by FIIs - which, mercifully, has no such quota system - then some firms are big and some firms are small. Customers decide which firms gets to run money. If a government tries to impose an "equitable" quota system, this would hugely distort the market structure. Today, Business Standard has an excellent editorial criticising this "quota raj".