Mumbai: The UK and India, currently finalising a free-trade pact after London’s formal exit from the Eurozone, are working on a proposal as part of the comprehensive economic deal to help remove long-standing barriers to the settlement of sovereign bonds on Euroclear.
This could significantly widen overseas ownership of Indian government debt, which now will also be included in the globally tracked JPMorgan index.
The proposal says global clearing platform Euroclear UK and International would act as a clearing house for settling Indian sovereign bond investments by foreign portfolio investors (FPI) after they concur on a mutually agreeable method with the Clearing Corporation of India (CCIL) for treatment of Long-Term Capital Gains (LTCG), banking sources aware of the developments told ET.
“The basic issue is that Euroclear cannot monitor LTCG,” said a source aware of the proposal. “As part of the UK-India FTA talks, the plan that is being discussed is that Euroclear UK will act as the clearing house for FPI bond settlement in Indian government bonds, but CCIL will have data on trade reporting at the back end on buyers and sellers.”
If the plan were to fructify, potential inflows into the local bond market could be significant as settlement on Euroclear would lift geographic curbs, permitting foreign investors from anywhere to transact in Indian bonds without undergoing the process of registrations, sources said.
“After an FPI sells securities, at the end of every quarter, CCIL would share the capital gains liability with Euroclear UK, which in turn will communicate the information to the FPI investor,” said the executive cited above. “By the end of the financial year, the capital gains would be cleared.”
Emails sent to Euroclear and the CCIL requesting their responses on the matter remained unanswered until the publication of this report.
At present, the LTCG tax on foreign ownership is at 20%.
Euroclear UK and International is the central securities depository for the UK and is regulated by the Bank of England. The other Euroclear providers are Euroclear Bank, Euroclear Belgium, Euroclear Finland, Euroclear France, Euroclear Nederland and Euroclear Sweden.
ET had reported on October 25 that India and the UK are trying to find a middle ground to conclude a bilateral investment treaty along with the FTA.
“The proposed plan on Euroclear settlement, if accepted, is seen as being beneficial to both parties as Euroclear UK would expand its settlement business, while more FPI investment could flow into Indian bonds,” a second source said.
The deliberations on Euroclear UK come after JPMorgan last month included India in its emerging market bond index, paving the way for around $20-25 billion of foreign investment. Sources said that technical advisors to the Bloomberg Fixed Income index were in advanced stages of discussions on including Indian bonds on its gauges.
