Tax-free bonds by infrastructure entities like the National Highways Authority of India are drawing interest from private equity (PE) players, owing to high yields and the assurance of liquidity.
Two officials with merchant bankers involved with bond placements said such exposures were not for the long term, but for limited time periods. This is an avenue to park money before they see better returns elsewhere.
A partner with a Delhi-based private equity fund with assets worth $1 billion under management said there was room for global PE firms to benefit from the interest rate arbitrage. Returns of over eight per cent for PE funds registered as foreign institutional investors would enhance yields, given the yields in western nations are meager, owing to the liquidity deficit there.
Companies that are floating bonds also have robust financial profiles, and are present in sectors like infrastructure, which has huge potential for growth, he added.
Navin Bangera, senior vice-president, Centrum Capital, said bonds from strong institutions were an attraction for PE firms, and that these were safe bets. These bonds would be listed, providing liquidity and their investments would yield higher returns compared to the coupon rate. When the interest rates decline, these listed bonds, that carry a high coupon rate, would attract premium. When sold, PE firms could earn better returns, Bangera said.
The Reserve Bank of India had raised policy rates through 2010 and 2011 to fight inflation. This pushed yields and interest rates in the system. The repo rate was raised by 375 basis points, and now stands at 8.50 per cent.
With inflation pressure easing, the central bank has hinted at a change in the rate increase cycle. It may begin to cut policy rates in 2012-13.
S J Jayesh, director (resources), IDFC, said PE players were guided by specific norms for investments, allowing only limited exposure to such debt. This, however, was an interim phenomenon, since the firms await the deployment of funds into equity.