BackIDBI Bank raises Rs2,500 crore through Basel III bonds
Money raised by selling the additional tier-I bonds will help boost the core capital of a bank
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Mumbai: State-owned IDBI Bank Ltd said it sold ₹ 2,500 crore worth of Basel III compliant additional tier-I bonds.
Money raised by selling the additional tier-I bonds will help boost the core capital of a bank. The coupon set for the bond was at 10.75%, payable annually. The first such bond was issued by Bank of India in August where the lender had paid an 11% coupon.
Basel III is an international norm on capital preservation that all Indian banks must adhere to fully by March 2019.
The reason why coupons on Basel III compliant bonds are 100-150 basis points higher than normal bonds is that investors risk losing money if an issuer bank reports a loss in any year. However, in September the Reserve Bank of India (RBI) came with a set of guidelines where banks were allowed to dig into past reserves to pay their debt obligation. Earlier, banks were allowed to allocate the payment from their current year profit.
This is the first such bond issuance after RBI came with the revised set of guidelines on 1 September.
IDBI Bank’s bond offering was for ₹ 1,500 crore with an option to retain over-subscription up to ₹ 1,000 crore.
“The issue is perpetual in nature with call option after the instrument has run for 10 years. The amount mobilized would be counted as a part of tier I capital and enhance the capital adequacy of the bank," IDBI Bank said in a statement.
Banks are still wary of issuing such bonds because of the complexity involved but soon every bank will have to raise money through such bonds. However, no Indian bank has hit the international market to raise such bonds as low sovereign rating of the country prompts investors to ask for steep coupons. In the domestic market too, only a handful of banks have raised Basel III bonds. State Bank of India, the country’s largest bank, is notably missing among banks that raised such bonds.
“This issuance will pave way for other banks to issue tier I Bonds in the domestic market and will increase the acceptance of this instrument among the investors," said M.S. Raghavan, chairman and managing director of IDBI Bank.
Axis Bank Ltd, Darashaw and Co. Pvt. Ltd, ICICI Bank Ltd, Trust Investment Advisors Pvt. Ltd and IDBI Capital Market Services Ltd arranged the bond sale.
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