Masala Bonds Fail to Take off on High Costs

Lack of liq­uid­ity, high taxes de­ter bor­row­ers from rais­ing money

The Economic Times - - Money - Joel Re­bello & Saikat Das

Mum­bai: Masala bonds, the ru­pee se­cu­ri­ties touted as a re­place­ment for over­seas bor­row­ings for In­dian com­pa­nies, have failed to take off as lack of liq­uid­ity, risk pre­mium and high taxes de­ter bor­row­ers to raise money through this new fund­ing source.

Close to seven months af­ter the Re­serve Bank of In­dia (RBI) no­ti­fied the is­suance of th­ese new in­stru­ments, as many as six com­pa­nies have tried but even­tu­ally de­clined to is­sue th­ese bonds, cit­ing high costs.

Bankers say the 5% with­hold­ing tax and illiq­uid­ity pre­mium that for­eign in­vestors de­mand is at the heart of why there has been no is­sues. Last week, RBI tried to ad­dress part of the prob­lem when it cut the ten­ure for th­ese bonds to 3 years from 5 ear­lier.

The cen­tral bank also brought th­ese bonds un­der the over­all ₹ 2.44 lakh crore limit for for­eign in­vestors in cor­po­rate bonds. The re­duc­tion in ten­ure is likely to re­duce hedg­ing cost for in­vestors, re­duc­ing the cost of is­suance­forIn­di­an­firms,bankers­said. How­ever, it is un­likely to lead to the first do­mes­tic masala bond is­suance.

“The re­duc­tion in ten­ure is a step in the right di­rec­tion but in­vestors are wor­ried about liq­uid­ity,” said Rakesh Garg, MD, Bar­clays In­dia. “In over­seas mar­kets, liq­uid­ity is not there. In­vestors do not even know whether they will be able to sell the bonds.”

Bankers said with­hold­ing tax adds 40-50 bps to the cost of the bond plus the illiq­uid­ity pre­mium that for­eign in­vestors de­mand, which means that the dif­fer­ence be­tween an on­shore ru­pee is­suance and an off­shore is­suance is at least 50-75 bps, mak­ing lit­tle sense for com­pa­nies to is­sue th­ese se­cu­ri­ties in the for­eign mar­ket. One ba­sis point is 0.01 per­cent­age point.

Half a dozen top rated com­pa­nies — HDFC, state-owned NTPC, In­dian Rail­waysFi­nanceCor­po­ra­tion,Power Fi­nanceCor­po­ra­tion,De­wanHous­ing Fi­nance — haveshelved­planstoraise funds af­ter meet­ing in­vestors in Asia and Europe. Adani Trans­mis­sion too had tested the wa­ters.

Garg sug­gested al­low­ing do­mes­tic in­sti­tu­tional in­vestors to buy and sell th­ese bonds at sec­ondary mar­ket over­seas to cre­ate liq­uid­ity. “The mo­ment you al­low fun­gi­bil­ity, there will be syn­chro­ni­sa­tion of yields be­tween on­shore and off- shore mar­kets,” he said.

How­ever, oth­ers ad­vice cau­tion. “It does not make sense for do­mes­tic in­sti­tu­tions to buy th­ese bonds. Why should they spend $5,000 and trade in th­ese bonds in Lon­don when t hey c a n buy them in Church­gate? For is­suers, it cre­ates a new mar­ket for in­vestors. This will pick up as the econ­omy grows and the ru­pee is stable,” said Hi­ten­dra Dave, head of global bank­ing and mar­kets for In­dia at HSBC.

Keki Mistry, CEO at HDFC, one of the first com­pa­nies to try is­su­ing th­ese bonds, said the costs of is­su­ing th­ese bonds has to come down which can lead to is­suances. “We can take a 10 to 20 ba­sis point hit to cre­ate a new mar­ket but 50 to 75 ba­sis points cost dif­fer­ence is too much. But we will still look at th­ese bonds when­ever there’s ap­petite in the mar­ket and the ru­pee is strong be­cause it cre­ates a brand new con­tin­u­ous source of funds for us,” Mistry said.

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