Foreign institutional investors (FIIs) are likely to be allowed to invest in corporate bonds issued by infrastructure companies on a first-come-first-served (FCFS) basis.
At present, FIIs have to go through the auction route. The government is planning to replace auction with the FCFS route, as it feels such a policy shift would encourage FIIs with relatively low risk-taking ability to invest in these bonds.
The limit for foreign institutional investment in corporate bonds issued by infrastructure companies with residual maturity of over five years was raised in the Budget 2011 from $5 billion to $25 billion. The government reckons that since auction route has driven away many potential investors, the enhanced limit would remain un-utilised unless the FCFS route is adopted. FII investments in bonds meant for the infrastructure sector haven’t gone beyond $500-600 million, despite the limit (pre-Budget) being $5 billion. Infrastructure projects typically don?t yield returns in the initial years.
Industry experts have welcomed the proposed adoption of FCFS policy. Ernst & Young?s Ashwin Parekh said that as massive investments are required to bridge the country’s infrastructure deficit, first-come-first-served policy would come in handy. Given the high risk involved with long gestation infrastructure projects, the auction route could inflate pricing and, therefore, might not be a good idea from a practical standpoint, he said.
Giving new lease of life to infrastructure sector, finance minister Pranab Mukherjee also permitted FII to invest in unlisted bonds with a minimum lock-in period of three years in the form of special purpose vehicles. The FIIs will be allowed to trade amongst themselves during the lock-in period. The government also plans to create infrastructure debt funds and also announced tax exemption by cutting the withholding tax to 5% from the current 20%. However, there is no clarity yet on how these funds would be set up.
