Budget 2020: FPI limit in corporate bonds increased – Will you benefit?

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Updated: Feb 01, 2020 6:17 PM

Budget 2020-21: The government, plans to increase the investment limit of FPI in corporate bonds. But how will it affect investors - will you benefit from it?

budget 2020, budget 2020 for foreign investors, budget 2020 for NRIs, Union Budget 2020, Foreign Portfolio Investors, FPI limit in corporate bonds hike, FPI budget, corporate bond budget 2020, Foreign Institutional Investors (FIIs)Budget 2020-21: The government, plans to increase the investment limit of FPI in corporate bonds. But how will it affect investors – will you benefit from it?

Union Budget 2020: Finance Minister Nirmala Sitharaman in her second Budget 2020 speech introduced various changes, one of the major changes being slashing tax rates to benefit individual taxpayers. Along with that, she has also proposed to hike Foreign Portfolio Investors (FPI) limit in corporate bonds from 9 per cent to 15 per cent.

The government, hence, plans to increase the investment limit of FPI in corporate bonds. But how will it affect investors – will you benefit from it? Experts say the hike in the limit will not make much of a difference and will not impact Foreign Institutional Investors (FIIs).

Prateek Mehta, Chief Business Officer, Scripbox says, “There is no major impact expected on interest rates or yields. On the G-dec side, the liquidity is high given the domestic participation. FPIs are not a big player in this space.” He further says, “The current utilization of the Cap is a fraction of the erstwhile stipulated maximum. Foreign Institutional Investors (FIIs) are not utilizing the current limits available to them. Hence, raising the limit doesn’t mean money will automatically flow in. Domestic liquidity is determining the price, and yield movements. Hence, not expecting a big impact because of the hike in the cap.”

The government’s new increased cap is not expected to make a large impact on individual investments (direct or via funds).

Along with the Finance-Bill 2020 proposition to hike Foreign Portfolio Investors limit in corporate bonds from 9 to 15 per cent, the government has also proposed to bring out a corresponding amendment in Section 194LC.

Suresh Surana, Founder – RSM India says, “Section 194LC which provides for a concessional withholding tax rate of 5 per cent in respect of monies borrowed by a specified company or a business trust from a source outside India by way of issue of the rupee-denominated bond (RDB) before 1st July 2020, to the extent such interest does not exceed the amount of interest calculated at the rate approved by the Central Government in this behalf.” Such a time limit is proposed to be revised and extended to 1st July 2023.

The finance minister in her Budget presentation also said certain government securities will be open for foreign investors. It was also proposed debt-exchange traded funds comprising mainly government securities while stating that Rs 22,000 crore has already provided as support to infrastructure project pipeline.

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