Budget 2012: Finance Ministry May Allow Foreign Investors to Directly buy Corporate Bonds Close.

NEW DELHI/MUMBAI: The finance ministry is considering allowing individual foreign investors to directly buy corporate bonds issued by Indian companies, extending to debt a similar facility recently allowed for equity investments that could, in the long run, help deepen the country's shallow bond market.

Finance ministry officials said the proposal, aimed at capitalising on the strong appetite for high-yielding Indian debt, was likely to be a part of the budget package for the financial sector, although the final decision on whether it would figure in the March 16 announcement would be taken by Finance Minister Pranab Mukherjee.

"Extending this regime to debt will largely complete the reforms agenda for overseas investors," a finance ministry official told ET.

In the last budget, Mukherjee had unveiled the so-called qualified foreign investor framework, allowing individual foreign investors to invest in Indian mutual funds. This was extended to equities on January 1.

The capital markets division in the finance ministry is already in discussions with the RBI on the proposal, which it thinks will deepen the corporate bond market and attract foreign flows needed to fund widening current account deficit.

At present, foreign individuals are permitted to invest in Indian corporate bonds only as a sub-account of a foreign institutional investor (FII), which in turn has to apply to Sebi on their behalf. Direct investment will make the process simpler and less expensive as investors will just have to open an account with a depository participant and place orders.

The government on January 1 this year allowed foreign individual investors, pension funds and trusts to directly invest in equities, a move that was followed by a market rally that seems to have caught many participants by surprise. The benchmark BSE Sensex has risen 17.4% so far this year, after falling 25% in 2011.

Experts said Indian debt yields were alluringly high and could attract investors in developed Western markets, many of whom could borrow funds at low single-digit rates.

Even after adjusting for currency hedging costs, foreign investors can hope to make good returns in case of investment in debt issued by top-tier Indian companies.

This compares with 1-2% returns in developed markets.

The benchmark 10-year government bond now yields around 8.2% while the yield on a triple-A rated corporate bond is higher at 9.6%. In the US, it's around 1.95% while in Germany, it is 1.84%.

"In most overseas markets, returns from fixed-income instruments are at historic lows in contrast with India where the rates have been rising so far," said Rakesh Puri, managing director at Elara Capital, a UK-based investment bank.

High yields have already attracted a swarm of foreign money into Indian debt. Foreign institutional investors invested $8.6 billion in Indian debt in calendar year 2011 and have already bought $3.3 billion worth of debt in the first 45 days of 2012.

December last year saw an unusual spectacle of some very aggressive bidding by overseas investors at an auction for permits to buy Indian debt in the market. FIIs bid 32% more than the $10-billion debt offered, reflecting the attractiveness of Indian debt paper that yields many times more than in advanced countries.

Foreign investors are allowed to invest up to $15 billion in government bonds and $20 billion in corporate bonds as of now, and there is pressure on the government to raise these limits in view of the strong interest in Indian paper. Widening the pool of overseas investors will necessitate an increase in limits. Experts say success of the scheme will ultimately depend on the ease of investing.

"The government has to ensure that there is a simplified KYC (know your customer) norm...and taxation issues," said Nimish Shah, managing director of Fortune Financial Services.

Source : economictimes.indiatimes.com