Deutsche Bank (DB) AG plans to approach the Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI) challenging Bajaj Allianz Life Insurance Co.’s decision to annul the sale of Indiabulls Housing Finance Ltd (IBHFL) bonds worth ₹210 crore to the German lender, two people aware of the matter said, requesting anonymity.
“The internal approvals are in place and DB International Asia Ltd is expected to file a formal complaint in the coming weeks," said the first person.
In October, Bajaj Allianz sold the bonds, which will mature in September 2021 and September 2022, to Deutsche Bank in three tranches at a coupon rate of up to 8.9%, but subsequently annulled the transaction citing an internal error. The trade, struck at a steep discount, was an over-the-counter (OTC) transaction on the National Stock Exchange (NSE). It led to a spike in the effective yield to maturity (YTM) by close to 40%, leaving several others, primarily mutual funds which held these bonds, with significant mark-to-market losses.
BloombergQuint had reported on 18 October that the transaction was part of an arbitrage product created to take advantage of the difference in the yields on Indiabulls Housing Finance’s offshore and domestic bonds.
According to exchange regulations, corporate bonds are traded over the counter and not on the platform. So, the role of the clearing corporation is just to facilitate delivery or transfer of cash. Unlike equities, it isn’t responsible for settlement and doesn’t provide counter-party guarantee, said the BloombergQuint report.
However, Deutsche Bank rejected the annulment, questioning the insurer’s motive. “The bonds were later offloaded by Bajaj Allianz to a third party at a higher price, which essentially kept the YTM above the coupon, thus paring the MTM losses for other bond holders," said the second person cited above.
“Deutsche Bank is seeking the price difference between its own buying price and that of the above-mentioned third party as compensation," he added. “In its complaint to the regulators, apart from seeking compensation, Deutsche Bank has also cited the collateral damage the episode will cause to the sentiments of overseas investors, if the regulators do not act," said the first person.
A spokesperson for Deutsche Bank declined request for comment.
Over the last few months, the corporate bond market has been rattled by news of defaults. Several credit-risk and medium-term debt mutual funds took large hits to their net asset values, after marking down debt paper of non-banking financial companies, which resulted in a deeper yield gap between the prices of government securities and corporate bonds. The 10-year government securities yield has dipped to 6.47% at present. In a 28 November note, brokerage firm Nomura noted that India’s still-weak growth outlook and widely anticipated fiscal slippage is expected to further depress bond yields.
In October, the International Monetary Fund (IMF) slashed its economic growth forecast for India to 6.1% for the current fiscal from its July projection of 7%, citing weaker-than expected outlook for domestic demand, while on 8 November, Moody’s Investors Service cut India’s credit ratings outlook to negative from stable citing concerns that the government could be unable to help stunted economic growth.
Owing to these factors, Nomura expected the third quarter gross domestic product (GDP) data of the ongoing fiscal to further lower yields as well as the monetary policy easing expectations, in the near term.