Budget 2016: Government pushes to increase fund flow to infrastructure, unlisted debt

MUMBAI: The government is trying to increase the flow of funds into infrastructure and unlisted debt securities by allowing Life Insurance Corporation of India ( LIC) to guarantee bonds from infrastructure companies and allowing foreign institutional investors ( FIIs) to invest in unlisted securities.

In his budget speech finance minister Arun Jaitley said LIC will start a dedicated fund to provide credit enhancement to infrastructure projects. "The fund will help in raising the credit rating of bonds floated by infrastructure companies and facilitate investment from long term investors," Jaitley said.

A guarantee from LIC could improve credit ratings for these bonds, allowing large domestic as well as foreign investors to buy them, traders said.

"Globally insurance companies guarantee bonds on behalf of companies by taking a premium. This could be a partial or a full guarantee. This has so far not been done in India. If done this will enhance the rating of the bonds allowing large investors like provident funds to invest in these instruments," said Sandeep Bagla, associate director, Trust Capital.

Both domestic as well as foreign funds have a cutting rating requirement below which they do not invest. Higher ratings will allow these investors to look at such bonds, Bagla said adding that the fine print will have to be watched out for.

The government will also allow FIIs to invest in unlisted debt securities and certificates issued by special purpose vehicles. This will also ensure higher fund flow towards these instruments.