It represents an increase of $20 billion over the earlier limit of $20 billion under this window.

The additional limit of $20 billion will be available to FIIs only for investments in corporate bonds issued by companies in the infrastructure sector, the Finance Minister, Mr Pranab Mukherjee, said in his Budget speech on March 01, 2011.

Also, the investments would have to be made in bonds with residual maturity of over five years.

This move would in effect take the overall limit for FII investment in corporate bonds of companies in the infrastructure sector to $25 billion.

Prior to this announcement, the total FII investment limit in corporate bonds was pegged at $20 billion, including a $5-billion sub-limit for bonds with a residual maturity of over five years and issued by companies in the infrastructure sector.

Meanwhile, Mr Mukherjee announced that FIIs would also be permitted to invest in unlisted bonds with a minimum lock-in period of three years. This is being allowed as most of the infrastructure companies are organised in the form of special purpose vehicles, it was pointed out.

However, the FIIs will be allowed to trade among themselves during the lock-in period.

To enable higher FII investment flows into the corporate debt market, the Centre had in January 2009, at the peak of the financial crisis, raised the FII investment cap in corporate bonds to $15 billion from $6 billion.

This limit was further hiked by $5 billion in September 2010 but with a rider that this incremental limit be invested in securities with a residual maturity of over five years issued by companies in the infrastructure sector.

This move was intended to ensure greater participation of FIIs on a longer term basis and also enable the flow of long-term resources to the infrastructure sector.

“To liberalise the portfolio investment route, it has been decided to permit Sebi-registered mutual funds to accept subscriptions from foreign investors who meet the KYC (Know Your Customer) requirements for equity schemes,” Mukherjee said while presenting the Budget in Parliament. “This would enable Indian mutual funds to have a direct access to foreign investors and widen the class of foreign investors in the Indian equity market, he added.

It is widely believed that the move would lead to a lot of mid-sized foreign funds and wealthy individuals looking at the Indian equity market more seriously. According to the current norms, foreign investors need to first register with the Securities and Exchange Board of India (Sebi) before investing in the domestic equity markets. As a result, mid-sized and smaller funds which did not have a significant India allocation chose alternative investment avenues, including offshore funds and participatory notes (PNs). Going forward, they just need to comply with the KYC norms and start investing.

Experts feel the government’s initiative could prove to be a “game-changer” for the Indian fund industry, as this would pave the way for large global investors to invest directly into mutual fund schemes.

“This includes Indian Railway Finance Corporation (IRFC): Rs 10,000 crore; National Highway Authority of India (NHAI): Rs 10,000 crore; HUDCO: Rs 5,000 crore and Ports: Rs 5,000 crore,” the Finance Minister said.

PORT PROJECT FINANCING AGENCY
The Ministry of Shipping will have to work out the mechanism for issuance and distribution of Rs 5,000 crore tax-free bonds for ports as proposed in the Budget 2011-12.

“We will study and work out a process on the agency which will issue such tax-free bonds. The funds mobilised will have to be distributed across projects undertaken in ports under the aegis of the Centre as well as States,” Mr K. Mohandas, Secretary, Ministry of Shipping, told Business Line.

The bond issue could be done by an agency that the Shipping Ministry had proposed to set up. The Shipping Ministry, in its maritime agenda for 2011, had suggested setting up of an Indian Maritime Finance Corporation, which would scrutinise and fund port projects.