Mumbai: The corporate bond market is unlikely to see foreign institutional investors (FIIs) lining up for investments in infrastructure debt despite the government easing the way, due to restrictions on the minimum tenure for investment and a lack of top-tier infrastructure lenders.
The minimum tenor requirement of 5 years and above and a lack of issuers among top-rated infrastructure firms are a hurdle to entry of foreign funds in this sector, bankers said.
“I think it’s a step in the right direction but I think it is ambitious. Funds will come in but not at a pace that is expected because the greater than 5 years (norm) is a constraint,” said Nirav Dalal, managing director and country head of fixed income and debt capital markets at YES Bank in Mumbai.
Finance minister Pranab Mukherjee on Monday raised the FII limit for investment in corporate bonds, with residual maturity of over five years issued by companies in infrastructure sector, by an additional $20 billion taking the limit to $25 billion.
This will raise the total limit available to FIIs for investment in corporate bonds to $40 billion.
Since most infrastructure companies are organised as Special Purpose Vehicles (SPVs), FIIs would also be permitted to invest in unlisted bonds with a minimum lock-in period of three years.
However, the FIIs will be allowed to trade amongst themselves during the lock-in period.
To attract foreign funds into the infrastructure sector, the government also plans to create infrastructure debt funds and to cut withholding tax to 5% from the current 20%.
However, there is no clarity yet on how these funds would be set up.
“This (FII debt limit increase) has been done keeping in mind that the CDS norms are going to be finalised very soon,” YES Bank’s Dalal said.
In a draft guideline on credit default swaps (CDS) released last week, the central bank suggested opening the door to FIIs to be included as “users”, which means they can buy credit protection to only hedge their credit risk.
Bankers said they would wait for the implementation of CDS to see if FIIs would take exposure to lower rated infrastructure companies by hedging their credit risk.
“The companies in the infrastructure space that are borrowing are SPVs that depend on project financing and their rating is quite low. Unless there is a framework where institutions can provide guarantees for infra companies’ debt, it will become difficult for these companies to issue bonds,” said Paritosh Kashyap, executive vice president- debt capital markets at Kotak Mahindra Bank.
Some bankers view the inclusion of infrastructure finance companies in the list of borrowers as a positive step.
“Very few companies in infrastructure have good ratings... infrastructure finance companies are a crucial bridge between the FIIs and the infrastrcuture projects and including them could help attract FII interest in the infrastructure sector,” said Kaustubh Kulkarni, director Capital Markets, Standard Chartered Bank
In late September 2010, the government increased the cap on FII investment in government and corporate bonds by $5 billion each to $10 billion and $20 billion, respectively.
Bankers said although the limits in government debt and corporate debt were lapped up completely, within corporate debt, there was little interest where there was a limit for investment in infrastructure bonds of over 5-year maturity.