RBI relaxes norms to woo FII investments in infrastructure sector

Posted on    05 November 2011

To attract foreign funds in infrastructure, the Reserve Bank of India (RBI) on Thursday made investment in infra debt papers easier.


Foreign institutional investors (FIIs) can now sell their investments in infrastructure bonds up to $5 billion (Rs.24,700 crore) in one year instead of waiting for three years. 


They can also invest in infrastructure bonds with different maturities instead of only investing in papers with a residual maturity of five years. Residual maturity is the remaining time until a bond matures. For instance, a 10-year paper issued in 2006 now has a residual maturity of five years as it will be due for redemption in 2016.


This is an important step, say bond dealers, as FIIs were not interested in investing in infrastructure papers and locking them in for three years. Besides, they typically don’t invest in papers that have a residual maturity of more than two years. Five years’ residual maturity was a hindrance in their investment pattern.


The government increased the FII limit in infrastructure debt funds to $25 billion only in April, from $5 billion earlier. With this, the overall limit that FIIs can invest in corporate bonds is $40 billion. They can invest up to $15 billion in plain corporate papers.


Besides, FIIs can invest up to $10 billion in government bonds.


The relaxation norms come at a time when foreign inflows are drying up, and the local currency is under pressure and losing its value against the US dollar.


India needs $500 billion worth of investment for its infrastructure needs by March 2012. However, investment in the space could fall short by 5%, according to the Planning Commission’s projections.


“Owing to the impact of the global downturn, there could be a shortfall of about 5% in achieving macro targets (during the 11th Plan),” India’s apex planning agency said.


In the year to date, FIIs have invested, net of selling, $404.8 million in India. In the last three months, FII have sold $1.77 billion net of buying equities and bonds.


The rupee recently crossed 50 a dollar, losing close to 12% since July, but closed at 49.13 a dollar on Thursday.


According to media reports, the government is also contemplating increasing the FII limit in government bonds. This is to ensure smooth sailing of its borrowing programme, which has been raised by Rs.58,000 crore in the second half of the current fiscal to bridge the fiscal deficit. The government’s borrowing plan for the current fiscal is at its historic high, and banks do not have enough appetite to buy government bonds.


In its notification on its website, RBI said FIIs can also invest in bonds issued by non-banking financial companies categorized as infrastructure finance companies, within the overall limit of $25 billion.


Originally they were allowed to invest in bonds issued by infrastructure companies, and capital market regulator Securities Exchange Board of India recently allowed them to invest in mutual fund debt schemes up to a limit of $3 billion.


FIIs can invest up to $25 billion in an infrastructure debt fund.


This was subject to the conditions that such instruments shall have a residual maturity of five years and above, and the investments will have a lock-in period of three years.


The reduced limit though is only up to $5 billion.


“It will bring in more FII interest in the infra bond market. In fact, Sebi has already started auctioning the increased limit to FIIs and it has got a good response,” said a bond dealer with a foreign bank who did not want to be named.


India’s current account deficit is widening. In the April-June quarter, it widened to $14.1 billion from $12.0 billion a year earlier. The deficit was at $5.4 billion in the March quarter.

Anup Roy


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