Mumbai: Close on the heels of the Reserve Bank of India (RBI) permitting Foreign Portfolio Investors (FPIs) to invest in municipal bonds, the capital markets regulator Sebi followed it up with a circular on Wednesday. Foreign Portfolio Investors can now invest in municipal bonds markets, the Sebi circular said. As per the RBI, foreign investment in municipal bonds should be within the limits set for FPI investment in State Development Loans (SDLs). The limits for FPI investment in SDLs is 2 per cent of outstanding stock of securities.
However going by the track record, FPI investments in State Development Loans (SDL) bonds have been rather muted. Moreover, lack of adequate and timely disclosure among Indian municipalities has resulted in lower demand for their securities.
As on March 2019, the total investment by FPI in SDL stood at Rs 2,468 crore, which is only 5.5 per cent of the allowed FPI investment in SDL as compared to 61 per cent of the allowable investment in central government securities and 76 per cent of the utilisation of the allowable limit in corporate bonds. This stands in stark contrast to the Narendra Modi government's pledge to spend $1.44 trillion on infrastructure. Only about seven municipal authorities have sold bonds since the capital markets regulator detailed rules in March 2015.
Anil Gupta, Sector Head, Financial Sector Ratings at ICRA explained, "The lack of interest of FPIs in SDL bonds is driven by lack of timely information in terms of the budget or the financial position of the state governments, relatively weaker financial position of many state governments and vernacular language of the budget documents, which makes such documents difficult to comprehend."
"The move will however be positive for better managed municipalities or state government entities such as the Kerala Infrastructure Investment Board, which has recently issued Masala Bond of approximately Rs 2,700 crore in the overseas market. This relaxation will allow FPI participation in similar issuances of better managed municipalities when they do future bond issuances in the domestic market," added Gupta.
As on March 31, 2019, the total investment by FPIs in central government securities was Rs 1.92 lakh crore while in corporate bonds FPI investment was Rs 2.19 lakh crore.
All other existing conditions for investment by FPIs in the debt market remain unchanged, the central bank had said in a circular on April 25. In 2017, Sebi eased rules governing the issuance of municipal bonds in order to boost such bond market. It allowed municipalities with surplus in their books in three immediately preceding financial years to issue public debt securities.