MUMBAI: The Securities and Exchange Board of India (SEBI) Chairman U K Sinha said he expects government would raise the limit for foreign portfolio investors (FPI) to invest in corporate bonds, even as he favoured greater retail participation and more access for manufacturing and small companies to raise capital from corporate bonds.
Developing a vibrant corporate bonds market is critical for the country’s economic growth. The infrastructure sector would require `30 lakh crore over the next five years, and banks need `5 lakh crore to meet the higher Basel-3 norms of capital adequacy by 2019.
FPIs have as of now subscribed to almost 60 per cent of local corporate bonds, especially after the quarter percentage point repo rate cut by the RBI increased their demand on expectations of further rate cuts.
Yield on the 10-year government bonds has declined to 7.69 per cent from 7.77 per cent a day before the repo rate cut last Thursday. “I am seeing a lot of enthusiasm from foreign portfolio investors, which was not there a year back.
My expectation is that this limit will be utilised soon,’’ Sinha said at a bonds seminar organised by Crisil. “My sense is that FPIs in corporate bonds is going to be enhanced, and as and when the government enhances the limit for investment by foreign portfolio investors there will be more opportunity and activity in that area.’’
The government, SEBI and the Reserve Bank of India would like to attract more interest from foreign portfolio investors in Indian paper rather than have these companies go overseas to raise funds in foreign currency, Sinha said. Borrowing overseas in foreign exchange involves a risk of the rupee or the currency appreciating or depreciating; hedging cost; and also increasing the country’s external debt.
Overseas funds invested $2.3 billion in Indian government and corporate bonds since January 1, 2015.
Foreign portfolio investors invested almost $26.24 billion in debt in 2014, compared with $16 billion in equities.
Sinha pointed out that 70 per cent of such bonds were sold by financial services companies including banks thereby leaving out manufacturing and small companies that will spearhead Make in India initiative.
Small companies raised a fourth of all the capital raised in corporate bonds. Top 10 issuers accounted for half the money raised and almost 90 per cent are AA or higher rated, which basically means lesser rated companies are unable to raise money in bonds.
Ninety-five per cent of them are on a private placement basis and that leaves out retail investors. In addition, corporate bonds don’t have access to debt recovery tribunal or SARFAESI Act for dispute resolution, said Roopa Kudva, the managing director & Chief Executive Officer of Crisil.
Kudva also recommended removing regulatory hurdles in permitting EPFO from trading these bonds.
EPFO, which has a corpus of Rs 7 lakh crore, has invested just Rs 4,000 crore in these bonds.