A change in the Indian bond market is here, according to Fitch Ratings. The regulation change from the Securities and Exchange Board of India will “reduce options for companies to diversify their funding sources,” said the credit rating agency.
It was announced earlier this month by the Securities and Exchange Board of India that rupee-denominated corporate bonds will only be allowed through auction when foreign holdings hit 95% of the cap. Foreign investors can invest up to $51 billion in corporate bonds issued by Indian entities, said Fitch, and foreign ownership is already over 95%. The offshore “masala bonds” will “cease entirely until foreign ownership falls to 92% of the cap.”
Interested parties can still use the Track III External Commercial Borrowing (ECB) route, but there is a higher withholding tax on interest. Foreign companies will also face a minimum maturity rate of five years on amounts greater than $50 million and additional administrative requirements.
Corporates “will need to have a minimum ownership interest in the onshore borrower or a common overseas parent” as well, Fitch said. This does not include entities such as banks and other financial institutions. Fitch believes the ECB Track III will not be the first place company’s turn, but it could become part of an option to meet their financial needs.
Masala bonds were first issued last year, “and the market still lacks the depth that would make them more attractive to foreign investors,” added Fitch. The Reserve Bank of India (RBI) also tightened masala bond issuance earlier this month, banning related entities from purchasing them, among other changes. “The RBI's regulations were more targeted, and aimed at ensuring that only relatively strong corporates tap the offshore market,” said Fitch.
– Michael Miller, editorial associate