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Business News/ Money / Personal-finance/  RBI moves to liberalize bond markets
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RBI moves to liberalize bond markets

The central bank says it would allow companies to sell rupee-denominated bonds in overseas markets

The decision, once finalized, will help Indian companies raise debt abroad without the currency risk typically associated with overseas borrowings. Photo: Hemant Mishra/MintPremium
The decision, once finalized, will help Indian companies raise debt abroad without the currency risk typically associated with overseas borrowings. Photo: Hemant Mishra/Mint

Mumbai: The Reserve Bank of India (RBI) on Tuesday said it would allow companies to sell rupee-denominated bonds overseas and at the same time pushed for greater retail participation in the domestic government bond market.

Both decisions, part of RBI’s attempts to liberalize and deepen the financial markets, were announced as part of the monetary policy statement.

Allowing firms to sell rupee-denominated bonds overseas could open up another avenue for fund raising by Indian companies and help them raise debt without taking on the currency risk typically associated with borrowings abroad.

The first set of rupee-denominated global bonds, termed masala bonds, were issued by the International Finance Corporation (IFC), an arm of the World Bank, in October 2013. This was followed up by bond issues across maturities ranging from three years to 10 years in 2014.

Most recently, in November 2014, IFC issued 1,000 crore worth of 10-year bonds that were listed on the London Stock Exchange.

Citing the experience of IFC, RBI said the appetite for rupee debt among international investors is a welcome development.

“... In view of this, it is proposed to expand, in consultation with the government of India, the scope of such bond issues by the international financial institutions as also to permit Indian corporates eligible to raise external commercial borrowing (ECB) through issuance of rupee bonds in overseas centres with an appropriate regulatory framework," RBI said in its policy statement.

Speaking at a post-policy press conference, RBI governor Raghuram Rajan said such borrowings would broadly fall under norms for ECBs, without providing further details.

Overseas borrowings by Indian companies have been on the rise as firms sought to take advantage of the lower cost of capital in markets like the US and Europe. In 2014, Indian firms raised $30.51 billion via ECBs.

The cost of hedging the currency risk involved in foreign currency borrowings takes away part of the advantage of lower borrowing costs. Allowing companies to issue rupee-denominated bonds will transfer any currency risk to the investor rather than the seller.

“From the issuer perspective, these are rupee-denominated bonds issued to offshore investors settled in dollars and, therefore, the currency risk resides with investors. The investor set is more broad-based than just FIIs (foreign institutional investors), as these instruments can usually be sold to other investors who prefer the fact that these are listed and cleared offshore," said Chetan Joshi, head of debt capital markets, HSBC India.

While the move could potentially open up a new pool of investors for Indian companies to tap, the benefits may initially be restricted to large high-rated corporate entities that have an established track record in overseas bond markets. Firms like Reliance Industries Ltd (RIL) are frequent issuers of foreign currency bonds. Over the past three years, RIL has borrowed nearly $10 billion through such bonds, Mint reported in December.

Shankar Raman, chief financial officer at Larsen and Toubro, said that while issuers will not see a fall in the cost of raising overseas borrowings, the investor pool may widen.

“I don’t see the needle move in terms of pricing, since investors would build the currency risk in the pricing. However, there may be a wider set of investors who can invest directly," he said, adding that over time this may also help improve the acceptability of the rupee in international markets.

“If you allow trading of such rupee-denominated bonds overseas, then it is a great move," said Seshagiri Rao, joint managing director and chief financial officer of JSW Steel Ltd. Rao, however, added that it is important to clarify the tax policies associated with such issuances to make the instrument a success.

Separately, RBI said it would encourage retail participation in the domestic market for government securities as a way to deepen bond markets.

Recognizing the need to tap private savings through government securities, RBI said retail investors and individuals could be provided direct access to both primary and secondary market platforms without any intermediary.

The central bank added that it would explore the creation of alternative channels of distribution (e-distribution channels) for government securities by RBI.

To be sure, retail investors have already been given web-based access to the secondary market trading platform. RBI said that since auctions of government bonds have moved to a new platform, web-based access would be provided there as well.

A non-competitive bidding facility which was made available for dated securities will now also be extended to treasury bills, said RBI.

“Increasing participation from retail investors will help broad-base the investor base in the government securities market. Eventually this can help in making the market less unidirectional. For investors too, government securities are among the safest investments," said N.S. Venkatesh, executive director at IDBI Bank Ltd, which is the only bank that currently offers direct access to retail investors to trade in the government securities market through its G-Sec portal Samriddhi.

State Bank of India chief Arundhati Bhattacharya and ICICI Bank Ltd CEO Chanda Kochhar, in emailed statements, said that the decision to enhance retail participation in government bonds was positive for the markets.

Most retail investments in the government securities now come indirectly, either through mutual funds or through insurance companies that invest a part of their corpus in government bonds.

RBI added that an implementation group with representatives from all stakeholders would be set up to roll out measures to facilitate direct participation from retail investors in the government securities market.

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Published: 07 Apr 2015, 01:31 PM IST
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