India considers sovereign bond options

India?s chief economic adviser is considering steps to boost foreign investment that may include the country?s first global offering of sovereign bonds, according to bankers who attended a meeting at the Ministry of Finance last Friday.

Raghuram Rajan took the unusual step of summoning bankers from international firms to present their ideas as the rupee slumped to a new low of Rs61.21 against the dollar.

Those proposals include a range of options, from a global rupee bond to a US dollar fundraising targeted at non-resident Indians, as well as further reductions in withholding tax and the removal of overseas borrowing limits.

Around 10 international banks attended the July 12 meeting with Rajan. Also present was Anup Wadhawan, joint secretary for capital markets in the department of economic affairs.

While bankers caution that discussions are at an early stage, the unusual meeting suggests that officials are at least considering a wider range of options as they seek to restore confidence in the rupee.

Calls for an international sovereign bond are not new in India, but have become louder in recent weeks as the rupee has slipped to new lows. The currency has lost more than 10% against the dollar since the start of May.

So far, analysts have focused on the idea of an offering in US dollars. A global rupee bond, however, would be offered to overseas investors and notionally denominated in rupees, but would be settled in US dollars.

?Investors don?t have to come down to India and set up shop to take local currency exposure, but just have to buy these bonds?

That format would give India a hard currency boost, while allowing overseas investors to take direct exposure to a currency that is not freely convertible.

?Investors don?t have to come down to India and set up shop to take local currency exposure, but just have to buy these bonds,? said a banker, who attended the meeting.

?Timing-wise, it may not be a great option, but a US$1bn to $2bn deal is doable. More crucially, this will offer India another avenue to tap investor demand,? the banker added.

Asking foreign investors to take rupee exposure at a time when the currency is declining may be a challenge, and Indian officials may well decide against such a move. However, there is a well-known precedent in Asia?s emerging markets ? the Republic of the Philippines issued a series of popular global peso notes in 2010?11.

NRI bonds

A global rupee bond would allow India to raise US dollars, potentially alleviating pressure on the rupee, while avoiding the foreign exchange risk that goes with a more traditional US dollar-denominated financing.

Bankers also suggested other fundraising options such as a more conventional US dollar sovereign bond, or an overseas bond targeted at non-resident Indians.

India has issued dollar bonds for so-called NRIs to boost its finances in the past, bringing in US$1.6bn in 1991, US$5bn in 1998 and another US$5bn in 2001. For many, that makes it a more likely step for government officials.

?As we have seen a precedent on the NRI bonds, it appears this option can be implemented more than others,? said a Singapore-based analyst.

Around 10 foreign institutions attended the July 12 meeting, including bankers from Bank of America Merrill Lynch, Deutsche Bank, Citigroup, Barclays, HSBC, JP Morgan, Goldman Sachs, Standard Chartered and Nomura. The last time such a meeting took place was over six months ago.

Shortly after that meeting, India increased foreign investment limits in the debt markets and streamlined procedures for the registration of foreign institutional investors.

Other steps

At the July 12 meeting, bankers also suggested that the government relax external commercial borrowing rules and extend the lower 5% withholding tax rate to all offshore interest payments to make it cheaper for Indian companies to access foreign currency funding.

At the moment, the 5% tax applies to all offshore loans, but only to offshore bonds linked to the infrastructure sector. Others are charged around 20%.

Bankers also asked for the abolition of pricing caps on overseas borrowings, which limit the rate of interest an Indian company can pay on offshore financings to no more than 350bp over Libor for three to five years and no more than 500bp for five and beyond.

Those caps are designed to protect Indian companies from taking on unmanageable foreign exchange exposure, but many complain that they make it impossible for smaller or lower-rated companies to access offshore capital at all. As a result, some borrowers have come up with complex credit-enhanced structures to avoid breaching the rules.

The pricing caps were reviewed last week and apply until September 30 2013. The last revision came in November 2011, when the ceiling on borrowings of three to five years was raised by 50bp. The Reserve Bank of India has left unchanged the ceilings on longer-term debt.

Desperate measures

The rupee recovered slightly this week after the government announced measures to ease rules for foreign investment and the central bank tightened liquidity

On Monday, the RBI raised both the marginal standing facility rate and the bank rate by 200bp to 10.25%, while also capping the amount up to which banks can borrow or lend under its daily liquidity window. It also announced a bond sale of Rs120bn (US$2bn) to drain excess cash.

The following day, India opened up to 100% foreign ownership several sectors, including telecoms, single-brand retail and oil and gas.

The rupee strengthened early Wednesday, opening at Rs59.05 against the dollar before easing to Rs59.40. The RBI measures, however, weighed heavily on stocks and bonds. The 50-share Nifty Index fell 1.6% Tuesday, while 10-year bond yields surged as much as 59bp to 8.26% and continued to rise the following day.

Source: http://www.ifrasia.com/india-considers-sovereign-bond-options/21097355.article

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