Tenure restrictions hold back investors from putting in more money into bonds
On the surface of it, the low-investment of foreign institutional investors (FIIs) in debt compared with that in equities may indicate that Indian bonds seems to be losing their sheen to overseas buyers.
Provisional data from the Securities and Exchange Board of India show FIIs invested more than $3 billion in equities during September but have put in a measly $147 million into bonds. So far in 2012, FIIs have bought equities worth $16 billion but invested only $5 billion in debt.
The reason for the low-investment is that most FIIs, which have invested in government and corporate bonds with no tenure restrictions, are holding on to these investments because sale of bonds will mean relinquishing limits as well.
Thus, free limits in government and corporate bonds are negligible for the Sebi to auction and other FIIs to buy. On January 3, Sebi had said an FII will have to relinquish debt limits if it sells its bond holdings that are twice the size of its portfolio as on that day.
Thereafter, FII will have to bid fresh at the next auction of debt limits. Sebi auctions debt limits on 20th of every month. Earlier, when an FII acquired a limit, it was for perpetuity. ?Most of the limits have been exhausted. Since nobody is selling, so there are no fresh limits available,? said Ashish Parthasarthy, head of treasury at HDFC Bank.
Currently, investment in government bonds with no tenure restrictions has neared the ceiling of $10 billion. SEBI did not auction limits in government debt of this category in September citing low availability of free limits. The capital market regulator, however, auctioned limits in long-term government bonds, corporate bonds and infrastructure bonds totalling around $420 million.
Out of this, $350 million were limits for long-term government bonds and infrastructure bonds that have restrictions in investments. FIIs can invest only in gilts with minimum five-year tenure under the long-term category and will have to lock-in their investment in infra bonds for at least 15 months.
?FIIs are unlikely to buy long-term corporate bonds or infra bonds. The return is not good enough for long-term investor to buy and hold,? said a bond dealer at a foreign bank.
With limits in gilts near the mandated ceiling of $10 billion and investment in corporate bonds too reaching the limit, incremental FII flows into debt is unlikely to rise this month either.
The Sebi?s auction of limits on October 20 will perhaps throw some light.