A subdued response from foreign institutional investors (FIIs) vis-a-vis long-term infrastructure bonds has prompted the finance ministry to ease norms for investing in these papers. To lure FIIs, it has reduced the residual maturity limit and the lock-in period for investment in such bonds.
Currently, FII investments up to $25 billion are allowed in long-term infrastructure bonds that have a minimum residual maturity of five years and a lock-in period of at least three years. The scheme will be modified with alterations to both clauses.
Last month, the finance ministry had allowed qualified foreign investors to subscribe to mutual fund debt schemes that invest in the infrastructure sector, subject to a total overall ceiling of $3 billion. This comprised the $25-billion ceiling for investment in corporate debt in infrastructure.
It has now been decided to carve $5 billion out of the remaining $22 billion for FII investments in long-term infrastructure bonds. This means FII will now be able to invest up to $5 billion in such bonds with an initial maturity of five years or more at the time of issue and residual maturity of one year at the time of first purchase by FIIs. There will be a lock-in period of one year, during which FIIs can trade among themselves but without being able to sell the bonds to domestic investors.
The remaining $17-billion limit can be invested in long-term infrastructure bonds that have an initial maturity of five years or more at the time of issue and residual maturity of three years at the time of first purchase by FIIs. These investments will be subject to a lock-in period of three years.
The finance ministry said the government has been monitoring FIIs subscription under the scheme. “It was observed that additional steps would have to be taken to increase the level of subscription by FIIs,” it said in a press statement.
As on August 31, against a ceiling limit of $25 billion or Rs 1,12,095 crore, investments by FIIs under this scheme were only $ 109 million or Rs 500 crore. “In view of this, consultations were held with stakeholders on the issue. It was concluded that the three-year lock-in period and doubts regarding the interpretation of the requirement of residual maturity of five years were discouraging FIIs from investing in this scheme,” the ministry added.
Investment in such bonds has not been as per expectations, according to a top government official. Therefore, to make this scheme attractive to FIIs, it has been modified in consultation with the Reserve Bank of India and the Securities and Exchange Board of India, said Thomas Mathew, joint secretary, capital markets. The market regulator is expected to issue notifications in this regard by October 15. The ministry will be willing to review the $5-billion limit if there is no risk and if the response from FIIs is good, he added.
A Senior IDBI Bank official said many FIIs had evinced interest in investing at the end of short end of curve (one year) to match risk profile. They will be interested in bonds issued by power sector entities like NTPC and REC a few years ago. Most public sector banks hold such bonds in their portfolio. Liquidity of such bonds would grow, releasing bank funds for further infrastructure lending.
Earlier, following the announcement by finance minister Pranab Mukherjee in Budget 2011-12, the government had raised the limit for FII investment in long-term corporate bonds issued by the companies in the infrastructure sector from $5 billion to $25 billion.
