FII caps on G-Sec, corporate bonds up

The finance ministry on Thursday decided to increase the investment limit for foreign institutional investors (FIIs) in government securities and corporate bonds by $5 billion each. FIIs would be able to invest up to $15 billion in government securities, compared with the current $10 billion (Rs 43,650 crore), and up to $20 billion (Rs 74,416 crore) in corporate bonds, compared with the current $15 billion.

“The incremental limit of $5 billion can be invested in securities without any residual maturity criterion,” the ministry said in an official statement. The Securities and Exchange Board of India is expected to issue a circular that would bring into effect these changes in the next few days.

As on October 31, against a ceiling of Rs 43, 650 crore in government securities, FIIs had invested Rs 41,253 crore, while against a cap of Rs 74,416 crore in corporate bonds, FIIs had invested Rs 68,289 crore.

“In view of this, there is little space available for further FII investments in government securities and corporate bond markets. The policy has been reviewed in the context of India’s evolving macroeconomic situation, the need for enhancing capital flows and making available additional financial resources for India’s corporate sector,” the ministry said.

The last enhancement in these investment limits for FIIs was carried out on September 23, 2010. The ministry hopes these enhancements would increase investments in debt securities and help further develop the government securities and the corporate bond markets in the country. Officials said the ministry's next focus would be allowing qualified foreign investors in equity.

Apart from government securities and corporate bonds, there is a limit of $25 billion (Rs 112,095 crore) for FIIs investing in long-term infrastructure bonds. In the wake of subdued response from FIIs for investment in such bonds, the finance ministry had recently eased the norms for investing in the scheme and had reduced the residual maturity limit and the lock-in period for investment in such bonds.

Among other recent key decisions, the ministry had allowed high net worth individuals to invest in infra debt funds, said infrastructure finance companies were eligible issuers for FII's debt limit for infrastructure and allowed the refinance of buyers'/suppliers' credit through extra commercial borrowings (ECBs). It had also permitted interest during construction under ECBs, allowed availing of ECBs denominated in rupee (since the borrower was insulated from the exchange rate risk) and given clarity on equity definition for ECBs from foreign equity holders.

With interest rates in the country ruling high, the finance ministry had also allowed Indian companies to raise cheaper funds abroad to refinance their rupee loans. It had also said China's renminbi was an acceptable currency under ECBs with a ceiling of $1 billion.