To give a further boost to infrastructure financing, the Securities and Exchange Board of India (Sebi) on Friday allowed infrastructure finance companies (IFCs) to issue corporate bonds to foreign institutional investors (FIIs).
Currently, many infrastructure finance companies, including Power Finance Corp, Rural Electrification Corp and Indian Railway Finance Corp, are frequent issuers of bonds but FIIs are not allowed to buy such bonds.
In the Budget, finance minister Pranab Mukherjee had raised the FII investment cap in corporate bonds by an additional $20 billion to $25 billion but kept FIIs out of bounds of bonds issued by IFCs.
Sebi has now notified IFCs as eligible issuers of corporate bonds to FIIs. ?It has been decided that NBFCs (non-banking financial companies) categorised as IFCs shall now be considered eligible issuers for the purposes of FII investment under the corporate debt long-term infra category,? the Sebi circular said.
The finance ministry is also trying to reduce the lock-in period for FII investments in corporate bonds from three years to one and a half years. This would enhance the attractiveness of these bonds to foreign investors.
Last year, the IFCs as special category NBFCs were allowed to tap the ECB (external commercial borrowings) window through the automatic route so long as these overseas borrowings don?t exceed 50% of the companies? net-owned funds.
?How do you raise money in this choppy market? This is a big question. The sector (infrastructure) requires huge funds. Therefore, we have allowed IFCs to issue corporate bonds to FIIs,? an official said.
The category of IFCs was carved out of the NBFC category in February 2010. IFCs are required to deploy at least 75% of their total assets in infrastructure loans.
As per the Reserve Bank guidelines, an IFC is a non-deposit taking NBFC with minimum net-owned funds of R300 crore. Sources said the finance ministry is also seeking relaxation in minimum capital requirement, risk weightage to make it easier for the IFCs to access foreign funds.
Experts believe the Sebi?s move will provide a big support to IFCs. Sameer Kanabar, infrastructure expert from Ernst & Young said: ?The proposal will provide boost to these companies, but whether FIIs will find the bonds issued by IFCs attractive is a big question, since they chase higher returns mostly seen in equity schemes. Further clarity on the definition of IFCs and less-rigid norms will be encouraging.?
The corporate bond segment for infrastructure so far has received lukewarm response as a three-year lock-in period is seen too long for foreign investors. Also, as Kanabar pointed out, the fact that FIIs are allowed to trade among themselves only in the listed bonds and not unlisted ones is a dampener too.
Clarity on these issues can go long way in stimulating investments in the cash-starved sector. So far, just $500-600 million of the existing quota of $25 billion for foreign institutions has been used up by FIIs. India has huge infrastructure funding needs and intends to spend nearly $1 trillion between 2012 and 2017 to shore up roads, ports, highways and airports to sustain rapid economic growth. Inadequate funding has delayed the development of the sector.
Under the current regulations, Indian pension and insurance companies cannot invest directly in infrastructure projects, limiting a crucial source of finding. In the current five year plan that runs till March 31, 2012, such funds are likely to contribute to less than 7% to the total investment in projects.
