Worried over the lukewarm response of foreign institutional investors (FIIs) to infrastructure bonds, the government is planning to relax norms for such entities investing in corporate bonds issued by infrastructure companies.
According to official sources, the finance ministry is planning to reduce the lock-in period of 3 years to “even below 2 years” so that the bonds generate enough interest amongst FIIs.
In the Budget 2011-12, Finance Minister Pranab Mukherjee announced that the limit for FII investment in corporate bonds, with residual maturity of over five years will be increased to $25 billion, thereby raising the total limit for FII investment in corporate bonds to $ 40 billion.
FIIs were allowed to invest in unlisted bonds with a minimum lock-in period of three years, during which they can trade amongst themselves.
Of the $25 billion limit, however, FIIs have invested only $80 million till June 30, as per the data available with the government.
With the proposed relaxation, the sources added that the infra structure bonds would become more attractive for the FIIs.
According to analysts, the relaxation may see more participation by FIIs in the infrastructure bond market.
“In 3 years, the FIIs feel that their money is getting blocked. And since there is no vibrant bond market in India, they find it difficult to exit. This will be an opportunity for them to invest without their money getting blocked for long,” said Jagannadham Thunuguntla, strategist and head of research at SMC Global. India is in dire need of infrastructure and is looking at private sector money to finance its infrastructure development programmes.
“There is a reasonable chance that with this relaxation more FIIs may invest in the infrastructure bonds,” Thunuguntla said. In the Budget, the government had announced multi-pronged measures for infrastructure financing to supplement the government’s budgetary allocation to the sector. For 2011-12, Rs 2,14,000 crore have been allocated to the sector, 23.3 per cent higher than the allocation in the last Budget. The budgetary allocation on infrastructure accounts for 48.5 per cent of the gross budgetary support to plan expenditure.
The government plans to invest about $1 trillion during the 12th Five Year Plan period, beginning March 2012, to fund the massive infrastructure needs of the country.