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Overseas funds keep off corporate bonds

Fraud, illiquidity, downgrades take a toll on foreign investments.

, ET Bureau|
Updated: Sep 10, 2019, 04.08 PM IST
Mumbai: Instances of fraud, illiquidity, downgrades, and unsustainable borrowings have combined to hurt the prospects of India’s corporate bond market, with overseas funds shying away from investing in longterm debt securities of local companies.

Overseas investment holding in local corporate bonds has come down by about a tenth in the past one year, dashing hopes of creating a vibrant and liquid bond market that could emerge as a more suitable substitute to individual banks for raising corporate debt.

“The lack of liquidity in the domestic corporate bond markets has been another major factor spooking a lot of FPIs that ended up reducing their corporate bond portfolios,” said B Prasanna, head of global markets at ICICI Bank. “There is enough risk appetite among offshore investors to fund the capital needs of well-functioning Indian companies. We just need to demonstrate good governance and win back the trust of foreign investors.”

Foreign Portfolio Investors (FPIs) have used up 67.57% of their investment quota as on September 6, compared with 76.81% a year ago, showed data from National Securities Depository. Limits have dropped sharply when compared with September 2017, when FPI utilisation hit 99% of the investment cap. The available residual investment limit is now at Rs 98,287 crore, versus Rs 61,849 crore a year earlier.

“It is clearly evident that FPIs have trimmed their holdings in the debt market,” said Ritesh Bhusari, assistant vicepresident, Federal Bank. “This (the fall in usage limit) is mainly on account of select credit defaults, ALM mismatch, loss of faith on financials, tighter financing conditions, ambiguity over an FPI surcharge on debt investment and overall risk-averse sentiments,” he said.

FPIs can now invest up to Rs 3.03 lakh crore in corporate bonds, compared with around ?2.67 lakh crore a year earlier. The increase of limit did not attract money from overseas investors.

“Their (FPIs) exit was guided by a tightening rate cycle by the Fed,” said Gopal Tripathi, head — treasury and capital markets, Jana Small Finance Bank. “The FPI policy has stabilised and that should be encouraging FPIs to come back.”

FPIs have mostly invested in government securities and distressed assets, which have turned them net buyers in those specific segments. They find corporate papers illiquid, barring a few top-rated names.

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