Greenko used an offshore entity to sell US dollar notes at a spread higher than the limit set by the Reserve Bank of India’s external commercial borrowing rules. It then sold the same amount of rupee-denominated bonds onshore, and had the offshore unit buy the debt.
Greenko used an offshore entity to sell US dollar notes at a spread higher than the limit set by the Reserve Bank of India’s external commercial borrowing rules. It then sold the same amount of rupee-denominated bonds onshore, and had the offshore unit buy the debt.

Greenko bonds plunge as India bans overseas funding method

RBI on 25 November clamped down on Indian firms raising funds overseas and routing them to India through certain types of structures

Singapore/Hong Kong/Mumbai: Bonds of Greenko Group Plc. fell to a record after India’s central bank banned the method used by the hydro and wind power company to raise funds from overseas.

The company used an offshore entity to sell US dollar notes at a spread higher than the limit set by the Reserve Bank of India’s external commercial borrowing rules. It then sold the same amount of rupee-denominated bonds onshore, and had the offshore unit buy the debt. The central bank said on 25 November that such funds “cannot be used in India" and companies that do not comply “shall render themselves liable for penal action".

London-listed Greenko’s notes due 2019 plunged to 90.451 cents on the dollar as of 6.26pm in Singapore, the least since they were issued on 24 July on “concerns over possible legal risk", after the central bank closed the loophole, said Charles MacGregor, Asia head of Lucror Analytics Pte. India tightened overseas borrowing rules in 1991 after a balance of payments crisis forced it to pledge gold reserves to the International Monetary Fund in exchange for a loan.

“We’re still trying to understand if there are implications for Greenko from the RBI notification," said Muralidharan R., an analyst at Fitch Ratings Ltd in Mumbai. “Based on what information is available, it appears the RBI will not allow future transactions that contravene these guidelines or regulations, however there’s no sufficient clarity on whether transactions already completed are affected. We are investigating this."

Legal opinion

Greenko’s chief financial officer Vasudeva Rao Kaipa said the bonds were guaranteed by Greenko Group Plc., which is based in the Isle of Man, and the RBI regulation only applies to backing from Indian companies on borrowings by their overseas units.

“We haven’t violated any rules and took legal opinion," Kaipa said. Greenko Dutch BV, which issued the bonds, bought the rupee-denominated debt, he said.

The Reserve Bank statement didn’t name any particular company. Alpana Killawala, the central bank’s spokeswoman, declined to comment.

Indian companies, regardless of their credit score, can’t sell three- to five-year bonds offshore with an all-in cost of more than 350 basis points over the six-month London interbank offered rate. The ceiling is 500 basis points for notes with tenors of more than five years.

Greenko’s $550 million of 8% debentures mature in five years and were sold at an about 631 basis-point premium over similar-maturity Treasuries. Yields rose to 10.644% on Thursday.

Indian companies have issued $18.5 billion of bonds offshore this year, 26% more than in all of 2013, as banks rein in lending amid rising non-performing loans in Asia’s third-biggest economy.

The threat of penal prosecution by RBI probably refers only to future issuance, Mumbai-based Rajesh Simhan, the head of international taxation at law firm Nishith Desai and Associates, said by phone. “It should not affect the past," he said. Bloomberg

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