Saikat Chatterjee and Charlotte Cooper/ Reuters
Mumbai: Lifting a cap on foreign investment in Indian corporate bonds would mean more liquidity and a wider investor base to fund capacity expansion and big-ticket infrastructure projects, market participants said on Tuesday, 11 September.
Foreign investment in corporate debt is capped at $1.5 billion in a market capitalized at $36 billion at the end of March 2007, according to National Stock Exchange data.
Delegates to a credit conference in Mumbai said greater foreign participation in the debt market would help India finance much-needed new road and port projects and sustain its current economic growth rate of around 9%.
“The need for developing and opening our credit markets to overseas investors is the need of the hour,” Naina Lal Kidwai, country head at HSBC India, told the conference.
Authorities, struggling to contain inflation-fuelling inflows of capital into stocks and private equity, have also tightened rules on external borrowings just when the country is seeking $475 billion in funding to upgrade its infrastructure.
Companies have been raising cash via equity sales but, as this dilutes founder stakes, they also raise debt.
Investors and debt arrangers say the local market is too shallow to absorb large bonds and a host of rules restrict investment by banks and pension funds even in top-notch credits.
Shantanu Ambedkar, head of institutional debt sales at HSBC, told the conference India was the only country in Asia to impose quantitative restrictions on foreign investments.
Even in China, foreigners could invest as much as they wanted once they had the necessary clearances, Ambedkar said.
Turnover as a percentage of GDP — an indicator of market liquidity — was 0.9% for India compared to 4.8% for Taiwan, Ambedkar said.
Prime Minister Manmohan Singh says India must develop its credit market to fund growth, and a central bank-appointed panel said last year it should raise foreign investment limits in corporate debt ahead of greater capital account convertibility.
Market participants say the absence of market makers, onerous disclosure rules, lack of hedging tools and stamp duty which varies widely from state to state, are all holding back the bond market’s development.
Indian banks are wary of holding even highly rated credits as they have to mark-to-market regularly and state-run pension funds, the biggest investors, can only put a tiny percentage of their portfolios into blue-chip debt.
The market is dominated by AAA-rated credits and second-tier credits tend to borrow directly from banks.
Ramanathan K., head of fixed income at ING Investment Management, said bigger private sector issues, rather than a series of small ones, were needed to drive participation and improve liquidity.
Shobhit Mehrotra, senior fund manager at HDFC Asset Management, said even though regulators were concerned about foreign capital, they could loosen restrictions selectively.
“They could allow sectoral caps, allow more money to come into infrastructure, allow more money to come into five-year tenures and above,” Mehrotra told the conference.
Maneesh Malhotra, head of debt finance at HSBC, said allowing more foreign institutional investors (FIIs) would create a more liquid curve as they had the expertise and the funds to invest in riskier bonds.
“Something needs to be started and allowing FIIs to come in in a big way into India” would be a step, he said.