Lock-in period for FIIs in infra bonds may be cut to 1 year

With a view to attracting more foreign funds into the economy, the government is weighing the pros and cons of reducing the lock-in period of long-term infrastructure bonds for foreign institutional investors (FIIs) to one year.

"India is toying with the idea of reducing lock-in period of long-term infra bond for FIIs from three years to one year," a senior finance ministry official said.

The Reserve Bank of India had recently liberalised the norms allowing FIIs to invest up to $25 billion, up from the earlier limit of $5 billion, in bonds and debentures of Indian infrastructure companies.

FIIs registered with Sebi were also allowed to invest in non-convertible debentures and bonds issued by non-banking financial companies categorised as 'Infrastructure Finance Companies' (IFCs) by RBI, within the overall limit of $25 billion.

However, this is subject to conditions that such instruments shall have a residual maturity of five years or above and the investments would have a lock-in-period

of three years.

This lock-in-period is computed from the time of first purchase by FIIs.

The official said if the lock-in period is reduced, FIIs will find its more attractive to invest in such bonds.

To channelise savings for development of infrastructure sector, the government in 2010-11 introduced the concept of long-term tax savings bond. It provides tax exemption on investments up to Rs 20,000 in long-term infrastructure bonds.

This is over and above the existing tax saving limit of Rs 1 lakh (Rs 100,000).

The government proposes to double investment in infrastructure to $1 trillion during the 12th Five-Year Plan (2012-17).

A host of companies like IFCI, REC and IDFC had raised about Rs 8,000 crore (Rs 60 billion) through issue of tax-savings infra bonds in the last fiscal.

Foreign funds withdrew over Rs 3,200 crore (Rs 32 billion) from the Indian securities market in November amid concerns over the worsening debt crisis in the Eurozone.