FII ceiling may choke corporate bond market

The flurry of corporate bond issues seen in the recent past may come to a grinding halt with the Securities Exchange Board of India (Sebi) capping foreign institutional investors (FIIs) investment in this segment at $500 million, say market watchers.

The corporate bond market has seen an extraordinary number of issues worth over Rs 2,000 crore over the last few days. National Housing Bank (NHB) today closed a Rs 300 crore zero coupon non-convertible debenture with a three year tenor.

On Wednesday Housing Development Finance Corporation (HDFC) closed a Rs 200 crore floating rate bond with a 25 basis point spread over the one-year g-sec a tenor of two years.

On Tuesday Nabard closed a Rs 925 crore non-convertible debenture with a yield of 5.85 per cent and a tenor of three years. The short-term debt market was dotted with issuances from Exim Bank (Rs 350 crore) and National Housing Bank (Rs 300 crore).

"The flurry of activity of one-year papers will vanish with the new FII ceiling. FIIs will not be able to act as a catalyst in the corporate debt market," said Anil Ladha, senior vice president, I-sec.

Dealers say FIIs' current holding in corporate debt will be just about $500 million and they would therefore be unable to buy up any more papers.

But according to market sources, issuers such as NHB will not be deterred by the new regulation. NHB is likely to make another Rs 400-500 crore issuance shortly, they said. HDFC refused to comment on the development.

A debt market analyst said, "The spreads between corporate bond yields and corresponding gilts will widen going forward from the spreads of 40-50 basis points. Some dumping of corporate bonds has already taken place today and it may continue. Theoritically, secondary market volumes will also drop to Rs 50-100 crore from the highs of Rs 150 crore."

In the recent bond issues, domestic traders had bought up large chunks with the intention to sell it down to FIIs. This was under the belief that FII investment in corporate debt had been made unlimited when Sebi announced on Monday that FII investment limit in debt at $1.75 billion would exclude corporate debt.