Summary

Fin min has halved the lock-in period for FII investment into infrastructure bonds to 1.5 years from 3 years. Simultaneously, RBI has permitted the same reduction in lock-in period in offshore investment in IDFs. In Budget 2011-12, FM had proposed increase in ceiling for FII investment in infra bonds to US$25 billion from US$5 billion, with a three-year lock-in, within which FIIs could trade within themselves. (This had elicited only a muted response with FII investment being only Rs. 350 crore in the first three months of FY12). The Budget had also proposed setting up of IDFs and the withholding tax on interest payment on such investments was reduced from 20% to 5%, while profits from those IDFs would not be taxed at all. The same benefits should be available for offshore FII investments in infrastructure bonds as well, but have not yet been effected. It is felt that high withholding tax is preventing FIIs from investing in bonds. IDFs would be able to provide long term low cost refinancing, but only one year after the project has become operational. Banks would be largely financing the construction of the project, and after the COD, downselling their loans to IDFs, and thereby churning their infrastructure exposures more frequently. IDFs would be set up in two forms: (i) trusts mutual funds that would invest in a portfolio of infra projects, and issue units to fund these; trust IDFs will be monitored by SEBI; mainly for financing non-PPP based projects like power projects (ii) NBFCs company IDFs for financing PPP projects that would issue bonds; will be monitored by RBI While IDFs structured as companies would be enjoying reduced withholding tax rates, the same benefit is not currently available for trust IDFs. Not clear whether trust IDFs will be exempt from dividend distribution tax. RBI and Sebi will issue detailed guidelines for company-based and trust-based IDFs, respectively,

Posted: Fri, Aug 5 2011. 12:58 AM IST

Infra bonds lock-in period to be halved

The move, which will add depth to the debt market, aims to create greater interest among foreign investors Asit Ranjan Mishra
New Delhi: The finance ministry has decided to halve the lock-in period for foreign portfolio investments in infrastructure bonds to one-and-a-half years, two of its officials separately said. The move is aimed at encouraging greater interest among foreign investors in investing in such bonds and funding infrastructure projects in a country that, by some estimates, needs to spend around $1 trillion (around Rs 45 trillion) in the five years to 2017, with half of this coming from the private sector. Also Read |Rising bank rates boost corporate bond market

Reducing the lock-in period will allow the sale and listing of these bonds, thereby deepening the debt market. One of the two officials, speaking on condition of anonymity, said that the changes would be announced soon by stock market regulator Securities and Exchange Board of India (Sebi). The government has been considering this for some time, and in late July, while reporting the poor demand for such bonds in the first three months of this fiscal year, a few media reports had mentioned that the government was mulling a reduction in the lock-in period. While presenting the budget for 2011-12 in February, finance minister Pranab Mukherjee hiked the ceiling for investments by foreign institutional investors (FIIs) in bonds issued by infrastructure companies to $25 billion from $5 billion, with a three-year lock-in period, although they were allowed to trade the bonds with other FIIs even within this period. The move doesnt seem to have had the desired response, with FIIs investing just around Rs 350 crore in such bonds in the first three months of the fiscal year. The reduction in the lock-in period could change that, said an executive at a foreign bank, who too declined to be named. It will make their investments more liquid, he added. The two government officials said the Reserve Bank of India (RBI) has agreed to have the same reduced lock-in period for offshore investors in the proposed infrastructure debt funds (IDFs). In his budget speech, Mukherjee announced the creation of IDFs to accelerate the flow of long-term debt into infrastructure projects. To attract offshore funds into IDFs, the withholding tax on interest payments on the borrowings by the IDFs was reduced from 20% to 5% and their profits were exempted from income tax. The same benefit on withholding tax (one paid by foreign firms operating in India) should be extended to corporate infrastructure bonds, said Jayesh Mehta, managing director and country treasurer (global markets group) at Bank of America Corp. Foreign investors are not interested to put their money into infrastructure corporate bonds because of the high withholding tax. This is a bigger irritant than the lock-in period, he said. Infrastructure projects require long-term financing given their long payback period and banks have been unable to provide such funding given their asset-liability mismatch and narrow exposure limits to the infrastructure sector. IDFs are expected to provide long-term, low-cost refinancing for infrastructure projects by tapping into sources of savings such as insurance and pension funds as well as offshore institutional investors, who so far have played a limited role in financing infrastructure. However, they can only provide financing a year after the project becomes operational, which means that this becomes a sort of refinancing. By refinancing bank loans to existing projects, IDFs are expected to reduce a large volume of the existing bank debt and this, the government expects, will make that money available to fresh infrastructure projects. An IDF may be set up either as a trust or as a company. A trust-based IDF, which will be regulated by Sebi, will normally be a mutual fund that would issue units, while a company-based IDF, which will be regulated by RBI, will normally be in the form of a non-banking financial company (NBFC) that would issue bonds.

The IDF set up as an NBFC will mainly lend to public-private partnership (PPP) projects, whereas an IDF set up as a trust will take care of the funding requirements of non-PPP projects such as those in the power sector. While IDFs structured as companies will enjoy the benefit of a lower withholding tax, Mehta said it is still not clear from present guidelines whether trust-based IDFs will be exempted from dividend distribution tax, though he assumes it to be the case. RBI and Sebi will issue detailed guidelines for company-based and trust-based IDFs, respectively, soon, the first official said. Several committees, including a high-level expert panel on making Mumbai an international financial centre headed by Percy Mistry, the Deepak Parekh panel on infrastructure financing, and the R.H. Patil committee on deepening the bond market, had recommended easing of foreign fund flows into the under-developed corporate bond market to meet Indias rising infrastructure financing demands. [email protected]
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RBI issues guidelines for banks sponsoring infrastructure debt funds news 21 November 2011 Scheduled commercial banks in the country would be allowed to act as sponsors of mutual funds or non-banking finance companies for floating infrastructure debt funds (IDF-MFs and IDF-NBFCs) with prior approval from the Reserve Bank of India (RBI). Banks acting as sponsors to IDF MFs should adhere to SEBI regulations in this regard, RBI said in a notification today. A bank acting as sponsor of IDF NBFC should contribute a minimum equity of 30 per cent and a maximum equity of 49 per cent of the IDF-NBFC. The Banking Regulation Act does not provide for a bank holding shares in excess of 30 per cent of the paid-up share capital of a company, unless it is a subsidiary. However, the RBI said it would, based on merit, recommend to the government to grant exemption from the provisions of the Act for investment in excess of 30 per cent and up to 49 per cent in the equity of an IDF-NBFC. Also, investment by a bank in the equity of a single IDF MF and NBFC should not exceed 10 per cent of the bank's paid-up share capital and reserves. Investment in the equity of a bank in subsidiary companies, financial services companies, financial institutions, stock and other exchanges put together should not exceed 20 per cent of bank's paid-up share capital and reserves and this limit will also cover bank's investments in IDFs as sponsors. Banks' exposures to IDFs - (MFs and NBFCs) by way of contribution to paid-up capital as sponsors will form part of their capital market exposure and should be within the regulatory limits specified in this regard, RBI said. Banks should have clear board laid down policies and limits for their overall infrastructure exposure, which should include their exposures as sponsors to IDFs - (MFs and NBFCs). The IDFs - (MFs and NBFCs) should make a disclosure in the prospectus / offer document at the time of inviting investments that the sponsoring bank's liability is limited to the extent of its contribution to the paid-up capital. Banks which are desirous of sponsoring IDFs (MFs / NBFCs) may apply to the chief general managerin-charge, Department of Banking Operations and Development of the RBI. Banks have been allowed to sponsor Infrastructure Debt Funds (IDFs) in a bid to accelerate and enhance the flow of long-term funds to infrastructure projects for undertaking the government's ambitious programme of infrastructure development. Finance minister Pranab Mukherjee had in his budget for 2011-12 announced the setting up of infrastructure debt funds (IDFs). Since then, the government had come out with the broad structure of the proposed IDFs vide their press release dated 24 June 2011. IDFs can be set up either as mutual funds (MFs) or as non-banking finance companies (NBFCs). While IDF-MFs will be regulated by SEBI, IDF-NBFCs will be regulated by the RBI.

Rising bank rates boost corporate bond market

RECs rate on the 10-year paper is about 100 basis points (bps) higher than that on the government security of the same tenor Joel Rebello & Anup Roy
Mumbai: Rising bank lending rates have forced companies to look for cheap sources of funds outside the banking system, infusing life into the corporate bond market. On Thursday, state-owned Rural Electrification Corp. Ltd (REC) raised between Rs 3,500 crore and Rs 4,200 crore by selling bonds that will mature in three tranches of three years, five years and 10 years at 9.43%, 9.45% and 9.48%, respectively. RECs rate on the 10-year paper is about 100 basis points (bps) higher than that on the government security of the same tenor. One basis point is one-hundredth of a percentage point . The rates are attractive considering that last month Reliance Ports and Terminals raised Rs 2,500 crore at 10.40% by selling 10-year bonds, bankers said. They also pointed out that the rate REC is paying is much better than even the minimum loan rate most banks are currently offering to their top-rated corporate borrowers. The minimum lending rate, or base rate, at two of the largest banks in the countryState Bank of India and ICICI Bank Ltdis 9.50%. The recent rise in rates has made the choice easier for companies, said Ashish Ghiya, managing director at Derivium Capital and Securities Pvt. Ltd, a corporate bond broker. Even the best Indian companies will not get loans below 9.75% to 10.50% currently, so issuing corporate bonds now is a no-brainer, he said. There has been an increase in activity since, say, April and I expect this momentum to continue for some time because bank credit is not happening and even they are investing in these papers. Bank credit growth has slowed to 19.3% so far this year versus 21.3% growth last year as higher interest rates have dissuaded borrowers from seeking loans. The Reserve Bank of India (RBI) wants it to decelerate further to 18% in 2011-12. Though RECs rate is good, it will not be right to compare it with the bank base rate, said P. Mukherjee, treasurer at Axis Bank Ltd, one of the bankers to the bond sale. Its long-term money, which is looking very good now but its a fixed rate. Going forward, bank base rates will come off and hence, its strictly not comparable, he said, adding that companies usually swap the bond for an interest-rate future to turn it into a floating rate.

Bond traders though are more enthused by the fact that there is investor interest in the market despite big institutional investors such as Life Insurance Corp. of India or Employees Provident Fund Organization not buying the paper. LIC stayed away because last month it had invested about Rs 1,500 crore each in bonds issued by Indian Railway Finance Corp. Ltd and Power Finance Corp. Ltd (PFC). The PFC deal at 9.33% was executed just before the RBI increased its benchmark lending rate by a more-than-expected 50 bps. Traders were expecting a 25 bps increase; bond yields went up by 12-13 bps to factor in the change. The RBI move has nudged companies closer toward the corporate bond market, bankers said. Firms had waited in the sidelines for several months, waiting for the inflation to come down and rates to stabilize. But in July RBI increased its policy rate by 50 bps and sounded very hawkish. Firms can wait no longer for cheaper funds at a time when bank loans are much dearer than bond market rates, said an investment banker, who was involved in the REC deal. Bankers and traders expect more such issuances from private and state-owned companies, which could push up corporate bond yields. Steel Authority of India Ltd, Power Grid Corp. of India Ltd and National Hydro Power Corp. Ltd are among state-owned companies that have lined up plans to raise funds from the market. Private sector non-banking financial companies such as Tata Capital Ltd and Muthoot Finance Ltd have recently sold non-convertible debentures to the public but have shied away from long-term corporate bonds. Traders are hoping that high rates will force them to explore the corporate bond option as well. Deriviums Ghiya expects companies to raise more short-term money by selling commercial paper ranging from three months to a year on expectation that rates have peaked. There is a feeling that rates have peaked, so companies will look for short-term money, he said. Alpana Dave, vice president at Edelweiss Securities Ltd, said many issuers are still waiting on the sidelines to get a clear idea of the interest-rate scenario. [email protected]

SEBI allows infrastructure finance firms to float long term bond

PTI Aug 26, 2011, 08.54pm IST MUMBAI: Market regulator SEBI on Friday allowed infrastructure finance companies to raise funds overseas through long-term corporate bonds. "It has been decided that Non-Banking Financial Companies (NBFCs) categorised as Infrastructure Finance Companies (IFCs) by the Reserve Bank of India (RBI) shall also now

be considered eligible issuers for the purposes of FII Investment under the corporate debt long term infra category," SEBI said in a circular. This fund raising tool was so far limited to companies in the infrastructure sector. Investments in such bonds shall have a minimum lock-in period of three years. However, during the lock-in period, FIIs will be allowed to trade amongst themselves. During the lockin period, the investments cannot, however, be sold to domestic investors. In a bid to facilitate fund flow in the infrastructure sector, the government has recently enhanced FII limit from USD 5 billion to 25 billion for corporate bonds issued by companies in the infrastructure sector with a residual maturity of over five years.

Corp bond repos: another failure of the joint regulation model?

Secure settlement through clearing corporations and a repo market are among the top policy initiatives to revive the secondary market for corporate bonds In The Money | Mobis Philipose
On 1 December 2009, the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi) made the settlement of corporate bond trades through clearing corporations mandatory. Exactly a year later, Indias first corporate bond repurchase deal was struck between ICICI Securities Primary Dealership and Infrastructure Development Finance Co. Ltd. Secure settlement through clearing corporations and a repo market are among the top policy initiatives to revive the secondary market for corporate bonds. But, apart from the fact that they were both implemented on 1 December, unfortunately theres little in common in the way these initiatives have been implemented. While all financial sector regulators have bought into the idea of centralized settlement, only RBI has approved corporate bond repos. As a result, the market hasnt taken off, with only a handful of deals being struck since the first one over two months ago. Compulsory settlement of trades through clearing corporations of stock exchanges, on the other hand, was a well-coordinated move, with all entities regulated by RBI and Sebi required to comply. Other regulators, including those overseeing insurance companies and pension funds, followed suit and now almost all corporate bond trades are settled through clearing corporations. While no study has yet been done to assess the impact of this move, its fair to assume that market participants would now be much more comfortable transacting in corporate bonds, simply because centralized settlement considerably reduces counterparty risk. Needless to say, the market wouldnt have fully benefited if all regulators hadnt pushed for this. Similarly, unless entities regulated by Sebi and the Insurance Regulatory and Development Authority are allowed to participate in corporate bond repos, this segment of the market will not take off. Mutual funds, after all, are the biggest lenders in the collateralized borrowing and lending obligation (CBLO) market. Their participation on the lending side would lead to a pick-up in volumes in the corporate bond repo market as well. Sebi, interestingly, is still in the process of framing guidelines to allow mutual funds participate in this segment. (The regulator hasnt responded to a mail sent last Thursday asking for reasons for the delay.) According to Sebis website, in late 2007 it had requested RBI to initiate action on corporate bond repos since it fell under the latters regulatory purview. RBI finally came out with guidelines in early 2010 and made modifications later in the year based on market feedback. It is ironic that Sebi itself hasnt allowed its regulated entities access to the market, even three years after it approached RBI to get the market started. Sebi may have a legitimate concern about the liquidity risk associated with corporate bonds. If a large proportion of funds are lent against corporate bonds, a mutual fund could get into

trouble if its faced with redemption pressure. But this problem can surely be tackled by prescribing a limit up to which mutual funds can participate in the repo market. This will contain the risk in the system and at the same time provide room for mutual funds to provide liquidity in the new market segment. The importance of a well-functioning corporate bond repo market cannot be overstated. Globally, repo markets substantially increase the liquidity of the underlying product as well help in increase the investor base for the underlying product. Without doubt, a wellfunctioning repo market will increase the perception of liquidity of corporate bonds and as a result draw more investors both in the secondary and primary markets. One can argue that alls not lost and that as and when Sebi gives approval, mutual funds will enter the segment and volumes would grow over time. But this argument misses the importance of launching a new product well. Currently only a handful of RBI regulated entities are exploring opportunities with corporate bond repos. It wont be surprising if some of them lose interest because of the lack of liquidity. Theres a high likelihood of interest waning in the segment. On the contrary, if all prospective users were allowed to participate from day one, interest in the segment would have only grown with every passing day. Liquidity, after all, attracts liquidity. Apart from the failure of the interest rate futures market, this is another glaring example of the pitfalls of having two regulators work together on a product. Its important for policymakers to realize this and work on remedial measures quickly. Your comments are welcome at [email protected]

Sebi will let you sell, repurchase corp bonds on stock exchanges
Reena Zachariah, ET Bureau Feb 25, 2011, 06.24am IST MUMBAI: India's securities market regulator Sebi is planning to allow sale and repurchase agreements or repo in corporate debt on stock exchanges. Policy makers believe that an exchange-traded platform for trading of corporate bonds will infuse greater liquidity of the underlying product and also widen the investor base both in the secondary and primary debt markets. It will also give market participants access to relatively cheaper funds. The proposal was discussed at a recent advisory commit-tee meeting on corporate bonds convened by Sebi. Repo deals enable traders to exchange corporate bonds for cash, with an agreement to repurchase it at aprice and date pre-agreed price. The difference between the sale and repurchase price being the cost of borrowing to the lender. Last year in December, the central bank allowed corporate bond repos and the first deal was struck between ICICI Securities Primary Dealer-ship and Infrastructure Development Finance Company or IDFC. However, since then there has been no transaction. Analysts say that in corporate bond repos, the pricing is not uniform and the applicable margins are too steep. "Regulators should consider introduction of corporate bond repos on ex-changes in a standardised manner ," said RH Patil who heads Sebi's Coporate Bonds and Securitisation Committee. The repo market is now an over-thecounter market, where participants strike deals over the telephone rather than on the floor of an ex-change , and the transaction is reported on the Fixed Income Money Market and Derivatives Association platform. The tenure of such se-cured borrowing can range from one day to a year. Market participants say that if corporate bond repos are allowed on the exchange platform it could be similar to the collateralised borrowing and lending obligation or CBLO market. "It has to be like a collateralised borrowing and lending obligation transaction in a government security wherein the security lies with the clearing house and the identity of the buyer and seller is not revealed and so the pricing doesn't get impacted," said Ajay Manglunia, senior vice president, Edelweiss Securities. "The applicable margin should be according to the volatility ratio of the underlying security." In the CBLO market, pricing is done on the online platform, which enables players to borrow from the cheapest lender. But in the repo trade in corporate bonds, one would have to find a lender and negotiate the price as it is not technology-enabled. Also in the CBLO market, margins range between 0.5% and 5% depending on the tenure of the bond, whereas in the corporate bond market, the applicable margins are in the range of 10-12 %, which is steep and also not linked to the duration of the bond but depends on the rating.