Govt raises FII limit in G-Secs, corporate bonds

In order to develop the local bond market and boost long-term foreign investment in infrastructure, the government on Thursday increased the investment limit for foreign institutional investors (FIIs) in government securities (G-Secs) and corporate bonds by $5 billion each. The cap in G-Secs and corporate bonds now stands at $10 billion and $20 billion, respectively (up from $5 billion and $15 billion).

In case of G-Secs, FIIs will have to invest the additional $5 billion in securities with residual maturity of over five years. For corporate bonds, they will have to invest the incremental $5 billion in bonds with residual maturity of over five years issued by companies in the infrastructure sector.

“The enhancement of the investment cap will provide avenues for increased FII investments in debt securities, help investment in the infrastructure sector and the development of government securities and corporate bond markets in the country,” said a finance ministry statement.

“The policy has been reviewed in the context of lndia’s evolving macroeconomic situation, its increasing attractiveness as an investment destination and the need for additional financial resources for the infrastructure sector, while balancing its monetary policy,” the statement added.

FIIs have net bought debt securities worth $9.75 billion (Rs 44,833 crore) so far this year, data available on the Securities and Exchange Board of India (Sebi) website show. Since 1992, they have invested $17.21 billion (Rs 77,092.70 crore) in Indian debt securities.

Ashish Ghiya, managing director, Derivium Capital & Securities, a firm active in debt placement and trading, said while the move (raising cap on FII investment) was a step ahead, the existing limit was yet to be reached. “The present ceiling is $15 billion, but the outstanding FII investment in corporate bonds is about $11 billion,” he said. “FIIs are more interested in bonds floated by financial institutions like Nabard and the National Housing Bank. These institutions are least dependent on overseas investors to manage borrowing targets. FII interest in corporate bonds is limited,” he added.

Just because the ceiling is raised does not mean flows go up, points the head of a public sector bond house. More than four and half years ago (December 2005), a panel on corporate bond markets and securitisation headed by R H Patil gave its report, but nothing much had happened between now and then, said a member of the panel. Most recommendations, like uniformity in the stamp duty levied by the states on corporate bonds, steps to enlarge the issuer base and making the job of placement easier, are yet to be implemented.