PremiumCan India emerge as a centre for global financial transactions, at least for Indian companies? Yes, indeed, if only India would first develop a vibrant market for debt, both government and corporate, within India
Hong Kong's future as a global financial centre is less promising after China's authoritarian crackdowns—for controlling the pandemic and civil freedoms—leading to an exodus of expatriate finance industry professionals. Can India position Mumbai, or Gujarat's GIFT City as credible options to the firms and professionals looking for alternatives to Hong Kong?
In the first fortnight of January this year, Indian companies have raised more than $6 billion in foreign debt. Interest rates are low, there are good chances of the rupee strengthening against the dollar and global funds are eager to deploy a sliver of their corpus in a strong emerging market such as India. The only surprise is that so few Indian companies are taking advantage of this opportunity. However, no company raised the money at the International Financial Services Centre at GIFT City, Gujarat. They went abroad. Can India emerge as a centre for global financial transactions, at least for Indian companies? Yes, indeed, if only India would first develop a vibrant market for debt, both government and corporate, within India.
Is the problem that the rupee lacks full convertibility? Actually, the rupee is fully convertible for foreign investors, it is only for residents that there are restrictions on automatic convertibility. So, if a foreign investor wanted to take part in a masala bond issuance in India (rupee bonds issued to foreign investors who bear the exchange rate risk) it could bring in as much capital as required, and take it out later without any restriction. What of the associated currency, credit and interest rate risks? Can they be fully hedged in India? Alas, no. But Singapore will offer non-deliverable forwards for maturities longer than those available on derivatives on offer in India. If some transactions have to be carried out abroad, why split the issuance process, do a part in India and the rest abroad? It would be simpler to carry out the whole lot abroad.
The professionals who carried out the transactions for the Indian companies that raised debt abroad, on the sell-side as well as the buy-side, would have been people of Indian origin, for a sizeable part. The suppliers of capital could be located in India just as well as they are located in New York, London, Singapore or Hong Kong. What has to be done to bring large debt raising activity onshore?
India has done some bit of the needed spadework to make a debt market work in India. We have introduced a variety of derivative instruments to hedge against the risks inherent in debt issuance. The securities transaction tax remains a hindrance, though. The regulation now allows the netting of payables/receivables. The thing that still remains missing is an active secondary market for debt. The RBI must let go of its desire to control trade in government debt and to twist and turn short-term and long-term rates through active intervention.
Government bonds are securities and should be traded under the exclusive supervision of markets regulator Sebi. The government promised, in the 2019 Budge, to set up a Credit Guarantee Enhancement Corporation. It remains a good idea, a metaphysical virtue, not an operational entity that offers a useful incentive to kickstart an active bond market.
Indian bond issuances tend to be for keeps, that is, held to maturity, instead of being traded. Only active trade would help uncover the actual cost of capital in the Indian market.
Another vital step that is required might be to drop the insistence that only highly rated paper would be eligible for investment. Indian companies that raise money via bonds with a good rating are also those that can raise money anywhere in the world and banks are eager to lend to, without the costs and hassle of debt issuance. Only by letting subprime borrowers issue debt will India’s market for corporate debt take off. Let medium enterprises and Non-Banking Financial Companies that lend to the micro, small and medium enterprise (MSME) segment issue sub-prime bonds that offer rates of interest that incorporate sufficiently high-risk premiums. Large saving pools can afford to and would want to invest in such high-yield bonds, even with their high-risk profile, via allocating a small proportion of their total corpus.
Developing the market for sub-prime bonds is the way to create a vibrant market for debt where Indian companies can raise foreign capital by issuing foreign currency or rupee debt right here in India.
