New Delhi: The finance ministry has further liberalized investment by foreign institutional investors (FIIs) in infrastructure debt funds floated by companies to drum up more enthusiasm in the sector that needs large infusion of cash to expand in line with the economic growth.
The lock-in period has been cut to one year from three on an investment limit of $5 billion of the total ceiling of $25 billion for such investments. Such investments totalled just $109 million, or Rs 500 crore, as of 31 August, the finance ministry said.
Around $1 trillion of investment is required in infrastructure in the five years to 2017, with half of this coming from the private sector, according to the Planning Commission.
However, analysts said the latest move is unlikely to make any significant change in the investor sentiment.
“Lock-in period was never a problem,” said Jayesh Mehta, managing director and country treasurer (global markets group) at Bank of America Corp. “You have to address the issue of high withholding tax for which foreign investors are not interested to put their money into infrastructure corporate bonds.”
At present, FII investments in infrastructure bonds attract 20% withholding tax (as levied on foreign firms operating in India).
Mehta said the finance ministry’s approach is confusing.
“You want long-term investors, not traders. There has to be a consistency in the approach. Such decisions should not be taken on a trial and error method,” he added.
In his budget in February, finance minister Pranab Mukherjee had raised the limit on investments by FIIs in bonds issued by infrastructure companies to $25 billion from $5 billion, with a three-year lock-in period, although they were allowed to trade the bonds with other FIIs within this interval.
“It was observed that additional steps would have to be taken to increase the level of subscription by FIIs,” the finance ministry said in a statement. “Therefore, in order to make this scheme attractive to FIIs, the scheme has been modified in consultation with RBI (Reserve Bank of India) and Sebi (Securities and Exchange Board of India).”
Last month, the government carved a $3 billon window of the $25 billion limit especially for retail foreign investors. With the latest notification, the finance ministry said it will further create another window of $5 billion of the remaining $22 billion for FIIs, the lock-in for which will be one year instead of three years.