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IDBI's exercise of call option to hit investors

Mar 18, 2000

Industrial Development Bank of India (IDBI), has been raising funds through out this fiscal year on its flexibond issues at lower interest rates in line with the fall in the interest rate scenario. As a result of this it has decided to exercise the call options on its earlier existing high cost bonds that it has been holding. IDBI, is India's largest development finance institution and has been traditionally concentrating on project finance. It reported a turnover of Rs 74.6 bn for the year ending March'99.

For its recent Flexibonds-8 issue IDBI offered a return of 11% for a five year bond issue. It cut the rate of interest on this by 150 basis points from the earlier 12.5% offered in Flexibonds-7 in July'99.

The reason for IDBI to continue to raise funds via these bond issues is that they are able to raise funds now at much lower rates of interest. Also as these bonds offer tax sops investors are attracted to invest in these . IDBI's earlier flexibond issues offered interest rates ranging from 15%-17%. Hence they could easily use the funds they have collected in the last few bond issues to repay investors and finance the call option of the earlier series of these bonds.

These bonds have both a call as well as a put option. In a scenario of falling or stable interest rates IDBI has the option to exercise the call options on these bonds and in a rising interest rate scenario the investors can exercise the put option. They can get back their funds and invest them in instruments which give them a higher return.

In FY2000 IDBI has already exercised the call option on bonds amounting Rs 10 bn to Rs 12 bn, this has apparently helped it reduce its cost of funds from 13.5% in FY99 to 12.2% in FY2000. In FY2001 it has plans to redeem around Rs 25 bn to Rs 30 bn back to bond holders.

Though from IDBI's point of view it makes sense to return the high cost debt, bond holders will be in a fix. Many investors have locked in their funds in the various bond options varying for a period of 5-7 years and in some cases even for a longer period of time. Hence they will now be left with the option of investing these funds at much lower rates of interest in other places as interest rates have fallen in the last couple of years. The more strong hearted investors would probably be turn to the capital markets which have been very buoyant recently and could give them a higher rate of return. This could lead to higher investments flowing into the stock markets in the next one year.

The Indian investors are not used to receiving back their funds before time and this scenario could lead them to cautiously track their investments in future and gear them up for such possibilities again. In future they will learn to be more proactive towards their investment decisions.

Market View:
As the market is still concerned about IDBI's NPA's it is rated as a "SELL" by many analysts

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