Market regulator Sebi has barred foreign portfolio investors (FPIs) from purchasing short-term government securities -- the Treasury Bills.
The move is expected to prevent interest rate-related volatility.
At the same time, the Securities and Exchange Board of India said that existing investments in Treasury Bills or T-Bills will be allowed to taper off on maturity or sale.
FPIs would encompass all foreign institutional investors (FIIs), their sub-accounts and qualified foreign investors (QFI) under a new regime that comes into force on June 1.
Existing overseas investor classes such as FIIs, sub-accounts and QFIs will have to convert to the new regime eventually.
"FPIs have been prohibited from purchasing T-Bills," as per information available with the Sebi.
It further said that existing "investments in T-Bills ...shall be allowed to taper off on maturity or sale. These investment limits which get vacated at the shorter end will be available at longer maturities."
Investments by FPIs in government securities will be permitted only in dated securities of residual maturity of one year and above.
Earlier, there was a sub-limit of USD 5.5 billion for investments in T-Bills.
The new regime divides FPIs into three categories as per their risk profile and the KYC (know your client) requirements and other registration procedures would be simpler.
Category-I FPIs (lowest risk category) will include foreign governments and government-related foreign investors.
Category-II FPIs will include regulated entities, broad-based funds whose investment managers are regulated, university funds, university-related endowments and pension funds.
Category-III FPIs will include all others not eligible under the first two categories.