As FIIs lap up infrastructure bonds, govt plans to raise limit further
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NEW DELHI | MUMBAI: The finance ministry is considering raising the limit of foreign investment in bonds of infrastructure companies from the current $5 billion after a new liberal rule triggered a rush for such paper at an auction early this month.
The ministry, which had reduced the lock-in for foreign institutional investors in August, is expected to take up the proposal with the Reserve Bank of India soon as it wants to push up capital inflows when other sources of funds are fast drying up because of the global crisis.
FII bids for Rs 22,500 crore ($5 billion) worth of bonds of infrastructure companies had crossed Rs 35,000 crore at an auction on October 7, the first after the introduction of the new rules.
"The response has been spectacular," a finance ministry official told ET. "It shows that there is appetite for such paper and the changes made in the framework have helped."
The 2011-12 budget had raised the limit for FII investment in longterm bonds issued by infrastructure companies from $5 billion to $25 billion. But FIIsinvested just Rs 600 crore by August, prompting an overhaul of the scheme.
In the reworked scheme, the government set aside $5 billion for bonds floated by infrastructure companies on more liberal terms than those available for investment in regular corporate bonds. The lock-in period and residual maturity was slashed to one year from three years and FIIs were allowed to trade among themselves even in that one-year lock-in period.
Also, $3 billion was set aside for infrastructure debt funds while leaving $17 billion for others. Foreign investors may have been reluctant to block funds in the current uncertain scenario despite the attraction of high interest rates and the chances of rupee appreciating from the current levels. So the shorter lock-in and investment horizon seems to have clicked.
Thirty-four bidders lapped up the entire limit with bids going from 8.01 basis points to 13 basis points. A total of 65 FIIs had put in bids worth Rs 34,711 crore. Since the government caps foreign investment in debt, capital market watchdog allocates the entire limit among FIIs through a competitive bidding, limiting one bidder to a maximum of Rs 2,000 crore.
"FIIs prefer to invest in shorter maturity papers as the lock-in period is less and they run lower duration risk in a rising interest rate scenario," said Arvind Konar, head (fixed income) at Delhibased investment banker Almondz Global Securities.
India needs an estimated $1 trillion for infrastructure during the 12 Five-Year Plan. The Finance Ministry is keen to raise more funds for infrastructure and boost capital inflows amid worries over a possible rise in the current account deficit.
The government had raised the limit for FII investment in longterm bonds of infrastructure companies to open new channels of funding for the infrastructure sector and to facilitate the emergence of a vibrant corporate bond market.
However, Ashish Ghiya, managing director, Derivium Tradition Securities, is not convinced of the need to increase the limit. "Lot of foreign institutional investors bid for the limits due to the $5-billion ceiling," he said. "We need to wait for few months to see the actual utilisation amount, which may be not more than $3 billion."
The ministry, which had reduced the lock-in for foreign institutional investors in August, is expected to take up the proposal with the Reserve Bank of India soon as it wants to push up capital inflows when other sources of funds are fast drying up because of the global crisis.
FII bids for Rs 22,500 crore ($5 billion) worth of bonds of infrastructure companies had crossed Rs 35,000 crore at an auction on October 7, the first after the introduction of the new rules.
"The response has been spectacular," a finance ministry official told ET. "It shows that there is appetite for such paper and the changes made in the framework have helped."
The 2011-12 budget had raised the limit for FII investment in longterm bonds issued by infrastructure companies from $5 billion to $25 billion. But FIIsinvested just Rs 600 crore by August, prompting an overhaul of the scheme.
In the reworked scheme, the government set aside $5 billion for bonds floated by infrastructure companies on more liberal terms than those available for investment in regular corporate bonds. The lock-in period and residual maturity was slashed to one year from three years and FIIs were allowed to trade among themselves even in that one-year lock-in period.
Also, $3 billion was set aside for infrastructure debt funds while leaving $17 billion for others. Foreign investors may have been reluctant to block funds in the current uncertain scenario despite the attraction of high interest rates and the chances of rupee appreciating from the current levels. So the shorter lock-in and investment horizon seems to have clicked.
Thirty-four bidders lapped up the entire limit with bids going from 8.01 basis points to 13 basis points. A total of 65 FIIs had put in bids worth Rs 34,711 crore. Since the government caps foreign investment in debt, capital market watchdog allocates the entire limit among FIIs through a competitive bidding, limiting one bidder to a maximum of Rs 2,000 crore.
"FIIs prefer to invest in shorter maturity papers as the lock-in period is less and they run lower duration risk in a rising interest rate scenario," said Arvind Konar, head (fixed income) at Delhibased investment banker Almondz Global Securities.
India needs an estimated $1 trillion for infrastructure during the 12 Five-Year Plan. The Finance Ministry is keen to raise more funds for infrastructure and boost capital inflows amid worries over a possible rise in the current account deficit.
The government had raised the limit for FII investment in longterm bonds of infrastructure companies to open new channels of funding for the infrastructure sector and to facilitate the emergence of a vibrant corporate bond market.
However, Ashish Ghiya, managing director, Derivium Tradition Securities, is not convinced of the need to increase the limit. "Lot of foreign institutional investors bid for the limits due to the $5-billion ceiling," he said. "We need to wait for few months to see the actual utilisation amount, which may be not more than $3 billion."
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