Rajan revealed the proposed expansion in the RBI’s bi-monthly policy statement, published on April 8. The move is in line with the central bank’s efforts to de-risk the country’s economy by reducing the reliance on foreign currency debt, as well as encourage borrowers to tap a broader base of bond investors.
“The appetite for rupee debt among international investors is a welcome development,” Rajan said in the statement. “In view of this it is proposed… to permit Indian corporates eligible to raise external commercial borrowing through issuance of rupee bonds in overseas centers.”
While corporates have until now been prohibited from raising cash via offshore rupee bonds, a few international institutions, such as the International Finance Corporation (IFC), have been allowed to test investor appetite.
The most notable deal was IFC’s London-listed rupee issue last November, a Rp10bn ($162.5m) 10 year bond that was the longest tenor in offshore rupees so far (IFC had previously issued in three, five and seven years). The issue, nicknamed a Masala bond, was the first rupee deal to be listed in London.
The European Bank for Reconstruction and Development (EBRD) is another name that has tapped the market, as well as German development bank KfW, which debuted with a Rp2bn ($30m) two year private placement in February this year.
Triple-A rated IFC’s 10 year priced at 6.3%, some 2% through Indian government bonds at the time. But according to Rakesh Valecha, senior director and head of corporate ratings at India Ratings & Research, more attractive cost of funding is unlikely to be the driver for Indian corporate issuance in offshore rupees, particularly compared to more conventional options.
“While [the proposal] may not change the pricing for the issuing corporates, who earlier may have borrowed in foreign currency, it would possibly increase the investor base and provide some fillip to a bond market that has failed to otherwise take off,” he said. “If successful, it will also ensure that the risk of unhedged exposures by corporates is minimised.”
The latter point is what is likely to be most attractive to the RBI, too. Offshore rupee bonds are bought in dollars but denominated in rupees, with coupon payments and redemption also linked to the currency’s performance. That means that the FX risk is being shifted from borrowers to investors, a situation that is more to the RBI’s liking.
Small pool
Assessing likely investor demand for Indian corporate issuance in offshore rupee is difficult, since the only deals so far have been from top quality names like IFC that generally offer slim returns when borrowing in their more usual currencies.
The strong demand for the deals seen so far certainly shows that investors are willing to take the currency risk. The rupee has been fairly stable of late, and macro indicators, such as the fiscal and current account deficits and inflation, have been improving under Prime Minister Narendra Modi.
But demand for an IFC or a KfW says little about whether bondholders are ready to accept the credit risk and unfamiliarity presented by many Indian corporate names.
The dollar bond activity of Indian corporates is a better indication, but this market is dominated by a fairly small number of the very best names — big oil and gas firms (when that commodity is not in meltdown) and giants like Tata and Reliance.
Valecha says that worries about India’s insolvency regime are also likely to limit offshore rupee bond issuance to high grade issuers.
India’s bankruptcy and recovery tool, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, has recently been expanded to provide relief to non-banking financial corporations. But risks remain as the rules still lack investor protection and are often slow to come into effect.
“Concerns from investors about the ability to enforce security and the asymmetry of information from mid to small corporates may limit offshore rupee issuances percolating down the credit curve to the mid and small corporates,” he said.
What is beyond doubt is that such deals would offer an easier route into rupee exposure than currently exists, say bankers.
“Many investors are not investing in rupee bonds because they need to have registered under the Qualified Portfolio Investor scheme, but as these would be offshore securities they won’t have to,” said one Mumbai-based head of India DCM. “Also, the withholding tax will not be on the investors — the issuers will have to deal with it.”
Issuers will have to weigh up the advantages of being able to issue in offshore rupees against the hedging costs of issuing in a foreign currency. That also makes it harder to read the potential for the market, said another head of India and Southeast Asia DCM.
For now, bankers say they are waiting to see the upcoming guidelines and are looking for more details on tenor restrictions and taxes.