Foreign holding cap in corporate bonds may go up on surging demand

MUMBAI: The government may raise the limit on foreign holding of Indian corporate bonds as it believes that the existing $51 billion cap could be exhausted given the surging demand for Indian fixed income securities. An increase in the limit may well be a stepping stone for further reforms in the fixed income securities market, Securities and Exchange Board of India chairman UK Sinha has said.

“My sense is that foreign portfolio investment in corporate bonds is going to be enhanced, and as and when the government enhances the limit in the corporate bond market, there are going to be more and more opportunities in that area,” Sinha told an audience at a seminar on bonds. “I am seeing a lot of activity and enthusiasm from foreign portfolio investors and the withholding tax reduction has also helped.”

Investors are rushing to buy Indian bonds because of a huge arbitrage opportunity. While Indian bonds yield close to 8%, similar maturity bonds in the US and Europe yield about 2% or even lesser.


Although direct comparison of yields are not done given the exchange rate and liquidity risks, improved perception about India is drawing record amount of funds into debt securities.

Foreign investors are currently allowed to buy up to $81 billion of Indian debt. This is split into two categories — $30 billion of government securities (g-secs ) and $51 billion of bonds issued by companies. Investors have exhausted the limit on government securities and, in corporate bonds, it is about 63% of the $51 billion limit. “I also find that 70% of the issuances is through banking and finance companies,” said Sinha. “So those companies which are supposed to be part of the ‘Make in India’ campaign and those that are supposed to be needing resources are still quite a distance away from the corporate bond market and that percentage is still quite low.”

The regulator has also asked the government to enhance the legal provisions to enable bond holders recover their funds in case of default, a process that takes years now. Also, banks have the benefit of using the so called SARFAESI Act for recovery, which bond holders cannot. “The Act with regard to DRTs (debt recovery tribunals) or SARFAESI does not provide the same protection (to other investors) as has been provided to banks and financial institutions.

Sebi has taken up this matter with the government. We are actively pursuing it, we have no clue what they are finally going to do, but my impression is that our recommendations are being considered favourably,” Sinha said.