In India, the debt market has been restricted for certain class of foreign investors; until recently, you had to acquire auction quotas to invest. There is a whole set of global investors who would like a paper such as this one and has no operational challenge in investments, said Monish Mahurkar, director of IFC treasury client solutions. Mahurkar said the intention is to develop a rupee-denominated bond market offshore where, eventually, other issuers can raise funds. Further, an offshore market would attract long-term investors who prefer to hold rather than those who look for quick returns, he said.
The proceeds of the rupee bond issue will be brought into India and invested here, Mahurkar said. IFC currently has commitments of $4.5 billion in India.
IFC will pay an interest of 7.75% on these bonds, the lower end of the pricing guidance of 7.75-7.8% offered by the issuer. These bonds would be settled in US dollars on redemption and investors will bear the risk of movement of dollar/rupee currency pair.
The bond issue was oversubscribed and received R2,000 crore worth of subscription from across investor segments. Investors from the US formed the biggest chunk by putting in more than 74% of the total subscription. HSBC, JPMorgan and Bank of America-Merrill Lynch acted as lead managers for the bond.
IFC is the first organisation to issue rupee-denominated bonds in the overseas market with the eventual hope of developing an alternative source of funds for issuers looking to invest in India. Over the years, IFC has sold bonds in 13 local currencies, including the Brazilian real, the Chinese yuan and the Russian ruble.
It is only in a very few currencies that the full-scale offshore bond market has developed. Brazilian real is one such currency where the offshore market is bigger than the domestic market. But the general trend is that offshore market is subset of domestic market, said Mahurkar.
The rupee bond issuance comes at a time when the Indian government is talks with aggregators of global bond indices to include Indian bonds in emerging market indices. The issue also follows a waning interest from foreign institutional investors in rupee debt as evident from the recent selling by FIIs in the debt market since May. Between May and now, FIIs have sold more than $12 billion worth of Indian bonds.
According to an overseas bond arranger, the strong interest from investors was partly because they can hedge the currency risk in the non-deliverable forward market. You can always hedge the currency risk in the NDF market. Excluding the currency risk, a return of 7.75% is quite appealing, said the bond arranger.