Indian companies are seeking to rein in costs by tapping overseas capital as interest rates at home remain among Asia’s highest even after the Reserve Bank surprise reduction last month. This comes even after the Reserve Bank of India in the month of December clamped down on Indian firms raising funds overseas and routing them to India through certain types of structures.
GMR infra controlled Delhi International Airport ltd, the operator of the nation’s busiest airport, tapped global funds for the first time, selling $289 million of seven-year dollar notes at 6.125 per cent. It got offers worth $5 billion.
The State-lender Union Bank of India plans to issue a foreign- currency bond next quarter, preferably in US dollars, according to Chairman and Managing Director, Arun Tiwari.
In a notification on 25th November, RBI noted that some Indian firms access overseas markets for debt funds through overseas subsidiaries and associates and later route those funds back to their Indian operations.
One of the ways this has been done is through investment in rupee bonds floated by the Indian company. Taking note of such instances, RBI clarified that Indian companies are not allowed to “issue any direct or indirect guarantee or create any contingent liability or offer any security in any form for such borrowings by their overseas holding/associate/subsidiary/group companies except for the purposes explicitly permitted in the relevant regulations.”
Though the companies continue to raise funds abroad, the Central Bank remains cautious about the transactions. “Effectively, the circular will prevent companies from raising offshore bonds with the intent of routing the funds back to India via the issue of rupee-denominated bonds in the onshore market. RBI is watching every transaction closely,” an industry expert said.
The Reserve Bank of India lowered its benchmark repurchase rate by 25 basis points on January 15 to 7.75 per cent, the first cut since May 2013, after inflation slowed. Market experts believe, “For Indian issuers, they see attractive all-in cost of funding in the international debt capital markets as yields continue to remain low, particularly after the new Government in India lowered the withholding tax on foreign currency denominated coupon payments.”
The Modi-led Government reduced the withholding tax to 5 per cent from 20 per cent, effective since early October. After Indian sovereign rating was upgraded to ‘stable’ by Standard & Poor, the cost of raising funds overseas has come down for Indian companies and is likely to dip further in the coming days, until Federal Reserve tightens its monetary stance.
According to JPMorgan Chase index, the extra amount local firms must pay on dollar debt over US Treasuries has fallen 24 basis points from an 11-month high of 316 on January 16.