Masala fix leaves rupee unmoved
Bonds Government removes 5% witholding tax on issuers, as currency slumpsBY KRISHNA MERCHANTIndia last week eased restrictions
on Masala bonds and foreign
credit investors in a coordinated
move that analysts said would
do little to stem a slump in the
rupee.
The government waived the
5% withholding tax on coupon
payments on offshore rupee
bonds issued from September 17
to March 31 2019.
Typically, issuers absorb the
withholding tax, rather than
pass it on to investors, so the
tax holiday potentially allows
companies to raise funds at a
lower all-in cost – assuming
investors are interested.
The central bank has also
scrapped a rule preventing banks
from supporting Masala bonds
as market-makers, a step that
should boost liquidity in the
secondary market. Indian bankswere previously allowed to act as
arrangers and underwriters, but
were barred from holding more
than 5% of the issue size six
months after any bond offering.
India is also planning to
remove single-borrower limits
for foreign portfolio investors,
which currently cannot invest
more than 20% of their onshore
portfolio in corporate bonds
from the same corporate group,
and plans to review another rule
stopping individual FPIs from
subscribing to more than 50% of
any single bond issue.
The changes were announced
by finance minister Arun Jaitley
on September 14 to bolster
capital flows.
After a brief rally on that day,
the rupee weakened again and
was seen at 72.35 to the dollar on
Thursday, down 0.7% on the week
and nearly 14% year to date.
Many economists and bankerswere disappointed that the
government’s measures did not
include stronger steps, such as
non-resident Indian (NRI) bonds
to attract funds from the Indian
diaspora and buttress forex
reserves.
“In an environment when
investors are cautious of
emerging market risks as a
whole, I don’t think this will
result in an immediate flow of
funds to India,” said a trader
from a foreign bank.
Nomura analysts warned
that the boost to inflows may
fall short of the government’s
US$8bn–$10bn estimate.
Foreign institutional investors
(FIIs) have sold a net Rs443bn
(US$6.08bn) of rupee bonds year
to date, according to National
Securities Depository Limited
data as of September 18.
Bond arrangers have called for
the removal of withholding taxon the Masala market for a long
time, but analysts do not expect
it to make offshore rupee bonds
more appealing to investors
given the turmoil in emerging
market currencies.
“The bigger issue is investor
sentiment as currency volatility
and expectations of further
rupee depreciation weigh,” said
Neel Gopalakrishnan, senior
credit strategist at DBS Bank.
For overseas rupee bonds,
the bigger constraint for issuers
is the tenor. In June 2017, the
Reserve Bank of India raised the
minimum maturity for raising
Masala bonds to five years
from three years, “whereas for
investors a shorter maturity of
around three years was the sweet
spot”, he said.
HDFC Bank was the last
large domestic issuer to tap
the market, raising Rs23bn
(US$317m) from seven-year
Masala notes in March at 8.1%.
Dewan Housing Finance raised
a small tranche of Rs10bn from
five-year bonds in April at 8.95%.
The RBI last week alsoIL&FS woes dent debt issuance
Bonds Analysts flag risks to banking sector from troubled infrastructure groupBY KRISHNA MERCHANTIndian banks and credit funds
could be facing heavy losses if
the liquidity crisis at the troubled
INFRASTRUCTURE LEASING & FINANCIAL
SERVICES group rocks confidence
in other borrowers, analysts
warned last week.
Rating agencies Icra and Care
downgraded IL&FS to default
on September 17 following
irregularities in the firm’s debt
servicing, forcing funds to write
down their exposure by 25% in
line with local rules. The two
had already cut various IL&FS
instruments from AA+ to BB on
September 8-9.
Moody’s estimates that the
IL&FS group accounts for 2%
of the local commercial paper
market, 1% of all outstanding
corporate bonds and around
0.5%–0.7% of banking system
loans as of March 2018.The agency flagged concerns
that any hit to market
confidence could rebound on
financing companies that rely
heavily on the capital market
for funding, but it said the
likelihood of contagion was
limited since the issues are
idiosyncratic to IL&FS.
Killol Pandya, head of fixed
income at Essel Finance AMC,
said the IL&FS situation had led
to a “slight dip” in CP and bond
issuance over the past week.
“The reduction in issuance
volume is more pronounced
for papers which have weaker
ratings since there is a shift
towards safety,” he said.
The saga contributed to a rout
in financial stocks on Friday
afternoon trading, with Dewan
Housing Finance shares falling
40%, IL&FS Transportation
Networks down 17%, Indiabulls
Housing Finance 13.5% andRepco Home Finance 8.8%.
Credit markets sold off, too.
DHFL’s bonds expiring on June
2019 were quoted at a yield of
11% on Friday, up from around
9% in the past week.
IL&FS has been barred
from the CP market for six
months after it failed to repay
a CP falling due on August 28,
although it settled the debt in
full on August 31. It defaulted
on a Rs1bn repayment to Small
Industries Development Bank
of India on September 10,
and said it was also unable to
redeem commercial paper due
on September 14, 17 and 18,
without specifying the amount,
according to releases on IL&FS
website.
After running into trouble
on infrastructure projects, the
group had planned asset sales,
a Rs45bn (US$624m) equity
injection and a funding line fromits shareholders in the first half
of this financial year, said Care in
a September 17 note.
“However, the deleveraging
has taken longer than expected
time, while uncertainty about
the timely infusion of funds vis-
à-vis impending debt payment
obligations in the near term has
severely impacted the liquidity
profile of the company.”
Existing shareholders include
LIC, State Bank of India, Japan’s
Orix, Abu Dhabi Investment
Authority and India’s Housing
Development Finance Corp.
Moody’s warned that lenders
had not yet recognised exposure
to IL&FS’s weak road projects
as non-performing assets on
expectations of support from the
parent.
“One particular asset challenge
for banks in a potential IL&FS
default comes from the
company’s complex corporateNews