Indian public sector undertakings (PSUs) have become favoured issuers of foreign bonds, getting attractive rates in overseas markets to fund their expansion plans. Power Finance Corporation, for instance, raised $300 million from foreign markets earlier this month — the company’s second foreign currency borrowing in the current fiscal year. Earlier, PFC had raised $1 billion through the same method. That apart, state-run entities like NTPC have also followed the debt route to raise an even larger sum of $450 million via offshore bonds.
As these are sub-sovereign bonds (since they are issued by state run companies backed by the government), the firms managed to raise funds easily and at extremely low rates. So much so that even the central government is thinking about raising money through foreign sovereign bonds to fund its own expenditure.
In the case of REC, the company was successful in raising a sum of $650 million via offshore bonds — the first sovereign-linked issuer in the market after the finance minister announced plans for a sovereign bond series in the budget on July 5. Demand for these bonds also demonstrates a very strong investor appetite for Indian sovereign-linked paper, at a very tight pricing, ahead of a potential sovereign bond issuance, said experts.
One of the reasons is that bond yields are falling globally, making it cheaper for companies tapping overseas credit markets via bonds and loans. In fact, oil PSUs continue to be active borrowers after the Reserve Bank of India (RBI) had permitted fuel retailers to raise overseas loans last year to check the fall in rupee value. The RBI had relaxed its external commercial borrowing policy for IOC, HPCL and BPCL to allow them to raise $10 billion, with $750 million raised from overseas loans, for working capital needs.
Since then, companies like IOC and Oil India are already in the market to raise $900 and $550 million, respectively, through bond issue. “The issue was oversubscribed more than 4.5 times and got responses from most of the prime investors in Asia, Europe and the Middle East,” Oil India had said in a statement. Notably, OIL is the first oil and gas firm from India to get listed on the International Securities Market. Similarly, BPCL also plans to raise as much as $500 million through sale of foreign currency convertible bonds to meet its capital expenditure.
Amit Bannerjee, an independent merchant banker specialising in East Asian Funds, opined, “this is a new trend among PSUs, to borrow in foreign markets since rates are cheaper and their sovereign guarantees makes the rates very attractive.”
India’s representation in global debt market indices is small compared to other emerging markets currently. Once successfully established with investors, experts say, a global bond instrument will play a critical role in reducing local borrowing and alleviating pressure on local liquidity. “A good pricing for bonds in the global markets will have a trickle down impact on the local rates,” said Harihar Krishnamoorthy, treasurer, FirstRand Bank.
But, despite so many benefits, why have such methods not been used before? Experts point to the risks that come along with such issuances. Dollar-denominated bonds are more sensitive to global interest rates and global shocks, as seen in the 2013 taper tantrums, can lead to heightened selling pressure on Indian bonds.
For now, foreign investors’ holdings in Indian debt has been low, at about 3.6 per cent of outstanding government securities. In contrast, that number stands at 38 per cent in the Indonesian bond market and 24 per cent in Malaysia.
Why overseas bonds?
Since these bonds are floated by state-run companies backed by the government, they are considered sub-sovereign bonds, helping PSUs raise money through them easily and at a much more attractive cost
One of the reasons why overseas bonds are working out much cheaper sources of finance for Indian PSUs is the steadily fall in bond yields across the global market
In fact, Indian oil sector PSUs IOCL, BPCL and HPCL have become the most active borrowers in the markets after the RBI relaxed external borrowing norms last year