X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Rip-off India Bonds - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Sep 1, 1998

    Rip-off India Bonds

    So everyone is celebrating. The world has faith in India. India has raised money in these gloomy economic times. Four billion US dollars. "Raising twice the target amount at 175 basis points over the one year LIBOR indicates India is better placed than other developing countries" are the words reportedly said by Finance Minister Sinha to a private television channel. And yes, says State Bank of India, we will use some of that money raised to buy overseas debt issued by Indian companies. This will lower the yields on Indian paper and set the path for Indian companies to borrow abroad more cheaply.

    Let's take this step by step. Where did this US$ 4.16 billion come from? Estimates suggest that 50% of it came from State Bank of India and 50% from foreign banks. The Middle East and South East Asia accounted for 75% of this money or US$ 3 billion. Is that good news: well we will know one year later (long after this government has fallen) when details of NRI deposits are released. In FY97, NRIs placed a net US$ 4 billion in the non-resident bank deposits, most of this comes from the Middle East. If data for FY99 shows that NRI deposits were less than US$ 1 billion, it would be safe to assume that NRIs put their money into the Resurgent India Bonds rather than into the traditional bank deposits. No new money for India, just a change of clothing. At higher interest costs.

    That is the charitable view. The uncharitable view is that much of this money was fronted. A banker goes to an NRI and offers a loan. "Here", says the banker to the NRI, "is US$ 3 million as a loan. You put up US$ 1 million of your own money and apply for the RIB bond. I will charge you interest at 7% (my cost of funds), while you will get 7.75% as the interest from the RIB. So, Mr NRI, you make US$ 3 million x 0.75% or US$ 24,750 every year for lending me your name. Of course, Mr NRI, I will make some more money too. You see, I will deposit this money with the State Bank of India and get 9.5% interest so I will make 2.5% profit (difference between the 9.5% I get from the government and the 7% that may be the cost of my funds). And there is no foreign exchange rate risk since the government acts as a guarantor. Just a reminder: the last time our government issued similar bonds (The India Development Bonds, 1991) the government had a 40% loss on the exchange rate. Given the desire of our leaders in Delhi to leaders in Delhi to let the Indian currency " remain competitive" with the rest of Asia, the final cost of these Rip-off Bonds is likely to be over 17% per annum!

    Now lets examine the desire to buy back Indian debt. Money from the Rip-off Bonds will be used to buy Indian debt. This "rescue action" will raise the price of the debt paper and lower the yields, the cost of debt. It is hoped that the lower cost of debt will be taken advantage off by Indian companies which can then go abroad and raise more debt at a lower cost. What a tangled web we weave. Sounds like the age-old art of rescuing the share market! If shares are falling, institutions buy in the hope that rising share prices will attract more investors, and ultimately encourage companies to issue rights or go public to raise the capital needed to fund development. Or so the government thought process goes. In reality, the institutions buy shares, and the smart people dump them knowing it to be an artificial prop! Look for a replay of that in the debt market. The government will go out and buy Indian debt paper only to find that, when new debt is issued by Indian companies, no one will subscribe. So the government will have wasted money buying back its "own" debt and will have paid a "badla" cost of 17% and more to the holders of the Rip-off bonds.

    If you really want India's debt rating to go down, Mr Finance Minister, control your budget deficits and bring inflation down. And don't have these nuclear tests. And if you really need foreign exchange, stabilise your currency: no, strengthen it. In this uncertain economic environment the last thing a multinational needs to worry about is the 50% loss in currency they can expect from an investment in India every 5 years.

    What we are heading towards is a 1991-type crisis: a government in denial and in no control of the country's economic destiny. The good thing about a crisis, though, is that it will make us think a bit more about what we, the people want as a country and how to get there. And, yes, it will also give us a mention in Ripley's Believe it or Not!: The only Finance Minister to have taken a country close to bankruptcy two times!

     

     

    Equitymaster requests your view! Post a comment on "Rip-off India Bonds". Click here!

      
     

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    MARKET STATS