The market is strongly anticipating an increase in the foreign portfolio investors’ (FPI) investment limits in corporate bonds through a change in the exchange rate at which the limits were pegged earlier. The argument being put forward is that value of the rupee has depreciated since the original limits were fixed in dollar terms. As of now, FPIs are permitted to invest “$51 billion” or “Rs 2.44 lakh crore” into corporate bonds — both figures are mentioned on the depositories side by side. The exchange rate for this limit was set when the rupee was hovering around 50 to the greenback. “There is a very strong belief that the exchange rate would be changed to somewhere close to where the rupee is trading right now. This way, more limits would be available for investments,” said a foreign banker.
According to the latest depository data, FPIs have used up 99.50% of the permitted limit of Rs 2.44 lakh crore. If the exchange rate is adjusted to say Rs 65, the total available limit of $51 billion will translate into Rs 3.31 lakh crore. That would bring down the utilisation level to just over 71% of the permitted quota, leaving a lot of room for further FPI investments. However, an alternate theory says that the RBI is highly unlikely to make this concession considering that it would increase the limit by over Rs 80,000 crore at a time when inflows into Indian debt are at their highest and the rupee has strengthened appreciably. FPIs have so far pumped $19.89 billion into Indian debt and the rupee has been on an upward move.
Many low-rated firms are also believed to be waiting for this hike in limits to tap the overseas market for funds. The problem with directly approaching the offshore markets is that these firms are often unable to meet the external commercial borrowing guidelines. ECB norms require that for borrowings of three to five years, the all-in-cost ceiling be 300 basis points over six-month LIBOR or the applicable benchmark for the respective currency. For a tenure of over five years, the all-in-cost ceiling stands at 450 basis points per annum over six-month LIBOR or the applicable benchmark. Lower-rated issuers often get a higher yield which goes beyond the stipulated ECB ceiling and hence they often follow the convoluted structure of raising offshore funds through a foreign registered special purpose vehicle.
The modus operandi: First register an offshore special purpose vehicle (SPV), say in Singapore, which raises dollar funds in the offshore market. Since this is an offshore entity, there is no cap on the interest rate. This SPV then registers itself as a foreign portfolio investor (FPI) and uses the funds it has raised overseas to subscribe to non-convertible debentures (NCDs) floated in the domestic market by the onshore entity.
However, since FPI limits have almost been fully utilised, these firms are finding it hard to tap the overseas market.
Investment bankers have indicated that a clean energy firm was exploring possibilities of a dollar bond but then decided to wait till a possible hike in the FPI limits.