FOREIGN Institutional Investors (FIIs) shift assets from equity to infra bonds

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FOREIGN Institutional Investors (FIIs) may be net sellers in the domestic equity market, but they have not yet lost faith in the world's most populous democracy yet. These big investors have simply shifted focus to the country's debt market.

In October and November, FIIs invested Rs 5,540 crore or over $1 billion in long-term infrastructure debt instruments of companies, which have a oneyear lock-in and a residual maturity exceeding one year, new data put out by the capital markets regulator Sebi showed.

Attractive yields in India and expectations of a drop in interest rates, which would lead to capital appreciation on higher coupon bonds, are driving these savvy investors to the bond street. The Union government had revised the modalities for FII investment in this category of debt instruments in September by reducing the lock-in period to one year with one-year residual maturity.

FIIs have been allowed to invest up to $5 billion (Rs 26,951 crore) out of the total limit of $25 billion in long-term corporate infra bonds in India.

Earlier, FII investment in long-term corporate infrastructure bonds had a minimum lock-in period of three years, though FIIs were allowed to trade among themselves during the lock-in period. However, the investments could be sold to domestic investors during this period.

Over the past two months, some clarity has emerged on the inflation front and also the fact that growth is falling, which has led the market to believe that monetary cycle reversal is round the corner. This effectively makes the debt instruments attractive.

The reduction of the lock-in period to a third kick started activity in the bond market. October and November saw FIIs invest Rs 2,095 and Rs 3,445 crore in corporate debt long-term infra bonds with one-year lock-in and oneyear residual maturity. In contrast till September 30, FII investment in corporate long-term infra bonds with three-year lock-in and with three-year residual maturity had by and large remained unutilised.

The total FII limit in such corporate bonds is Rs 22,419 crore. This means a limit of Rs 16,879 crore is still available for FII investments in such bonds. However, analysts are not sure if the remaining investment limit in long-term corporate infra bonds will receive equally strong FII response given the macro-economic conditions globally, which has triggered to a flight to safety.

The situation outside is not great. It needs to be seen what kind of institution and sector FIIs are investing in. The investment might be going to project specific debt or it could be private equity investments through structured products, which may later be converted into equity. Sebi monthly data on FIIs' debt investment showed that they have almost exhausted the limit set for such investments in Indian gilts. As of November 30, FII investment limit in government debt of Rs 43,650 crore was almost exhausted with just Rs 651 crore additional limit available.

As per Sebi data, FIIs have invested Rs 39,607 crore in the debt segment so far in 2011 while they have been net-sellers to the extent of Rs 2,969 crore in the equity segment.

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What is Tax Saving Infrastructure Bond? These bonds are options given to infrastructure finance companies (IFCs) to support their lending to avoid dependence on banks. IFCs are not supposed to take deposits from retail customers. The bonds would be issued in the dematerialised format and investors can even buy it in physical format if they don't have a PAN card or demat account. The bonds will be listed on the Bombay Stock Exchange (BSE) and investors can exit the bonds in the secondary market after the completion of the lock-in period. These Bonds are Tax Saving Infrastructure Bonds. By making investment of Rs 20,000 in Infrastructure Bonds, you can avail tax exception under Section 80CCF. Section 80CCF is in addition to Investment of Rs 1, 00, 000 that you can make under Section 80C and Rs 20,000 under Section 80D and Section 80E for Education loans of the Income Tax Act. You can Download Infrastructure Bonds application forms for: 1)      Infrastructure Development Finance Company (IDFC) 2)      Larsen & Toubro Infrastructure Finance Company Limited (L&T) 3)      IFCI 4)      Rural Electrification (REC) 5)      Power Finance Corporation (PFC) 6)      Life Insurance Corporation (LIC) 7)      IIFCL Documents Required: 1)      Filled Up Application 2)      Copy of the PAN card (Self-attested) 3)      A Cheque in favour of the 4)      KYC Documents: Self-attested copies of the following documents are required to be submitted by the Applicants as KYC Documents: a.       Proof of identification for individuals: Any of the following documents are accepted as proof for individuals: Ø      Passport Ø      Voter’s ID Ø      Driving Licence Ø      Government ID Card Ø      Defence ID Card Ø      Photo PAN Card Ø      Photo Ration Card. b.      Proof of residential address: Any of the following documents are accepted as proof of residential address: Ø      Passport Ø      Voter’s ID Ø      Driving Licence Ø      Ration Card Ø      Society Outgoing Bill Ø      Life Insurance Policy Ø      Electricity Bill Ø      Telephone Bill (Land/Mobile). Procedure: 1)      Print the application form, print and Fill it up 2)      Attach the required Documents 3)      Submit the form in a collection canter near you   Find a collection canter: Collection canter near you

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