With an estimated requirement of $514 billion for infrastructure development in the current Five Year Plan and double the amount in the next plan, the government, as reported in The Financial Express on Friday, is considering to raise the $15-billion ceiling on foreign investment in corporate bonds. Though a greater flow of foreign money into the bond market will help develop the secondary market for bonds, the existing limit has never been used up. In fact, data from Sebi show that from November 1992 to March 25, 2010, foreign institutional investors have invested $11.5 billion in debt. Unlike shares, foreign funds have to seek permission from the regulator every time they buy government or corporate bonds, which is a real irritant. There should be a natural lock-in for foreign investors investing in infrastructure projects in the construction phase, which will prevent sudden flight of capital. Moreover, to encourage foreign money into infrastructure, projects must be completed on time and not get stuck in regulatory bottlenecks and land acquisition issues. This will give the confidence to foreign investors to commit money for longer durations. Also, the government?s reported move to exempt bonds, floated by banks to raise funds for infrastructure lending, from both SLR and CRR requirements will address the issue of asset-liability mismatch faced by banks and ease the constraint in raising long-term resources.
The corporate bond market in the country is still at a nascent stage and accounts for just 0.4% of the GDP, and state-owned public sector companies account for around 80% of the total market. The bulk of the corporate debt has been raised through private placements and they limit transparency in the primary markets. Interestingly, since the beginning of this year foreign institutional investors have bought bonds worth $4 billion, the highest ever amount in the last two years and the pick up is seen in short-term corporate debt papers since yields on short-term debt by companies is now lower than yields on certificates of deposits issued by banks. This trend will further help foreign investors to commit money in commercial papers. Globally, pension and insurance funds are increasingly looking at long-term infrastructure projects for new source of returns, better yield and better diversification of investment risk. In Europe, according to an OECD report, pension funds have invested $1 trillion in 900 projects in the last ten years. By 2030, the report says the global annual infrastructure requirements is likely to average 3.5% of world GDP and over half of the world?s infrastructure investment will now take place in emerging economies. A substantial part of infrastructure finance will come from insurance and pension funds. So, it?s time the government allowed insurance and pension firms, both domestic and foreign, to buy debt paper of infrastructure-focused companies and become active participants in long-term infrastructure financing in the country.