OFFSHORE BONDS - ECONOMY

OFFSHORE BONDS - ECONOMY

News: India's top lender SBI to consider raising $2 billion via offshore bonds

What's in the news?

●       State Bank of India, the country's largest lender, said on Monday it will consider raising $2 billion via offshore bonds.

●       Last month, SBI raised Rs 3,717 crore through additional tier 1 bond sale. The bank said this is the third Basel III compliant additional tier 1 (AT1) bond sale and the latest issue was closed at a coupon rate of 8.25 per cent.

○       The proceeds will be used to augment its additional tier 1 capital and overall capital base of the bank and also for strengthening capital adequacy in accordance with RBI guidelines.

What are Offshore bonds?

●       It is a debt instrument issued by an Indian entity in foreign markets to raise money.

Types:

1. Offshore foreign currency bonds
2. Offshore Rupee bonds. example, Masala bonds

Go back to basics:

Masala bonds:

●       These are the bonds issued outside India, by an Indian entity, in Indian currency.

●       The major objectives of Masala Bonds are to fund infrastructure projects, ignite internal growth (via borrowings) and internationalize the Indian rupee.

●       Any corporate and Indian bank is eligible to issue rupee denominated bonds overseas.

●       The framework for the issuance of rupee bonds overseas falls within the External Commercial Borrowings policy.

●       Investors:

○       These bonds can only be issued to a resident of such a country which is a member of the Financial Action Task Force (FATF).

○       Also, the security market regulator of the country must be a member of the International Organisation of Securities Commission.

○       These bonds can also be subscribed by regional and multilateral financial institutions where India is a member country.

●       Maturity Period:

○       The minimum original maturity period for bonds raised up to 50 million US Dollars equivalent in INR per financial year should be 3 years.

○       The minimum original maturity period for bonds raised above 50 million US Dollars equivalent in INR per financial year should be 5 years.

●       Eligibility:

○       Investors from outside of India who are interested to invest in Indian assets are eligible to invest in Masala bonds.

●       End-use Prescriptions:  The proceeds of the borrowing can be used for all purposes except for the following:

○       Real estate activities other than the development of integrated township / affordable housing projects.

○       Investing in the capital market and using the proceeds for equity investment domestically.

○       Activities prohibited as per the foreign direct investment guidelines.

○       On-lending to other entities for any of the above purposes and

○       Purchase of Land.

Additional tier 1 bonds:

●       AT1 bonds, also called perpetual bonds, carry no maturity date but have a call option.

●       The issuer of such bonds may call or redeem the bonds if it is getting money at a cheaper rate, especially when interest rates are falling.

○       They are like any other bonds issued by banks and companies, but pay a slightly higher rate of interest compared to other bonds.

●       Banks issue these bonds to shore up their core capital base to meet the Basel-III norms.

●       These bonds are also listed and traded on the exchanges. So, if an AT-1 bondholder needs money, he can sell it in the secondary market.

●       Investors cannot return these bonds to the issuing bank and get the money. i.e there is no put option available to its holders.

●       Banks issuing AT-1 bonds can skip interest payouts for a particular year or even reduce the bonds’ face value.

●       Regulated By:

○       AT-1 bonds are regulated by the Reserve Bank of India (RBI). If the RBI feels that a bank needs a rescue, it can simply ask the bank to write off its outstanding AT-1 bonds without consulting its investors.