The government has liberalised the regime for foreign investment in infrastructure bonds to step up the availability of funds for the sector that needs over $1 trillion in the 12th Five-Year Plan beginning Ap ril 2012.

Foreign institutional investors (FIIs) will now be able to invest up to $5 billion in infrastructure bonds having residual maturity of one year at the time of purchase and initial maturity of five years or more, a finance ministry release said on Monday.

The earlier regime restricted FII investment in infrastructure debt to listed and unlisted bonds that had a minimum residual maturity of five years. Besides, the investment was locked in for three years from the date of purchase. The lock-in period has also been reduced to one year and FIIs. Foreign investors would also be allowed to trade among themselves even in this one-year lock-in period but not sell to domestic investors.

The government will review the response to the amended scheme and could further raise the limit of $5 billion. "We will see how the new scheme works now...A review would be carried out in sometime," said a finance ministry official. The move comes following the ministry's consultations with the industry and other stakeholders and a detailed review of the scheme and FII response to it so far.

FIIs have remained lukewarm to this much-hyped scheme that was announced in the budget 2011-12. The government had raised the limit for FII investment in long-term corporate bonds issued by companies in the infrastructure sector from $5 billion to $25 billion to open new channels of funding for the infrastructure sector and also facilitate the emergence of a vibrant corporate bond market. As on August 31, 2011, investments by FIIs under this scheme were only $109 million, or Rs 500 crore, against a ceiling limit of $25 billion or Rs 1,12,095 crore.

"The government has been monitoring FIIs subscription under the scheme and it was observed that additional steps would have to be taken to increase the level of subscription by FIIs," the official said. He said it was concluded that the three-year lock-in period and doubts regarding the interpretation of the requirement of residual maturity of five years were discouraging FIIs from investing in this scheme.

"In order to make this scheme attractive to FIIs, the scheme has been modified in consultation with RBI and Sebi," the ministry statement said. The $5-billion investment allowed in shorter residual maturity bonds is a carve-out within the overall limit of $25 billion.