India’s largest telecom company Bharti Airtel raised around $2 billion in a dual currency international bond sale. It is the largest debt issuance by a domestic company till date. Bharti sold dual currency dollar and euro bonds to raise the money which will be used for repayment and refinancing of existing foreign currency debt. It is a first dual currency issuance by an Indian issuer and also largest fund raising exercise at a single time by an Indian issuer.
What are Dual Currency Bonds?
Dual Currency Bonds pay interest coupons in one currency and principal redemption for a fixed sum in a second currency, often the dollar.
A company may prefer issuing a dual currency bond to hedge any foreign exchange flows from its operations, or take a speculative view on currencies in order to get a lower cost of capital. Investors generally get an above-market coupon, but run the risk that, in this example, the dollar could plunge below the exchange rate used when the amount was fixed. Such bonds are enticing to borrowers who operate in the redemption currency because they have no long-term exchange rate risk.
Key Suggestions proposed by the RBI Panel:-
1) On existing Governance pattern of PSBs:
Criticizing the way in which the 26 PSBs are being currently governed, the panel blamed several “externally imposed constraints” like dual regulation by the RBI and finance ministry and external vigilance by agencies like the CVC and CAG for the distress of banks.
The government should reduce its stake in these banks to less than 50%, along with certain other executive measures for the removal of these constraints.
The Centre should distance itself from the governance of banks and the Bank Nationalization Acts of 1970 and 1980, along with the SBI Act and SBI Subsidiary Banks Act, be repealed as it finds “the selection process for directors is increasingly compromised”.
2) On Government’s powers in relation to the governance of banks
All banks should be incorporated under the Companies Act and a Bank Investment Company (BIC) be set up to which the government transfers its holdings in banks. BIC should be given power of governance of the banks. Until BIC becomes functional, a Bank Boards Bureau comprising former senior bankers should advise all board appointments, including those of chairmen and executive directors.
3) On existing Human Resource Policy in Banks
Change in human resource policy to encourage younger people joining top management. Private sector banks should be provided a more level-playing field with the public sector counterparts.
4) On governance issues in private sector banks
Ownership constraints that could misalign the interests of shareholders with those of top management must be removed. Allowing larger block shareholders generally enhances governance.
5) On distressed banks
Distressed banks, private equity funds, including sovereign wealth funds, should be allowed to take control of stakes of up to 40%.
6) On Evergreening of bad loans
Boards of banks need to be vigilant about the quality of the loans. The policy of private sector banks can be considered which incentivises senior management on the basis of bank profitability, and disburses the compensation through stock options. There is potential incentive to evergreen assets in order that provisions do not make a dent in profitability.
In the case of evergreening, fines can be slapped through cancellations of unvested stock options and claw-back of monetary bonuses on officers concerned and on whole-time directors, and that the chairman of the audit committee be asked to step down from the board.
Foreign branches and overseas subsidiaries of Indian banks have been allowed by the RBI to sell structured financial and derivative products in established financial centres even if these products are not permitted in India. However, these products like Exchange Traded Funds (ETFs) and Bond Derivatives are not allowed in the domestic market.
As per earlier norms, banks were not allowed to offer structured financial products through their branches or subsidiaries outside India that are not specifically permitted in the domestic market.
This was the outcome of the review of an earlier December 2008 circular that made it mandatory for banks to get prior approval of the RBI by rendering details of the products, including their regulatory treatment prescribed by the host-country regulators.
RBI restricts companies from refinancing of rupee loans via External Commercial Borrowings (ECB) route
RBI has barred Indian companies from raising money from subsidiaries of Indian banks overseas via the External Commercial Borrowings (ECBs) to refinance their rupee loans. Thus, Indian companies will not be allowed to raise ECB from overseas branches or subsidiaries of Indian banks for the purpose of refinance/repayment of the rupee loans raised from the domestic banking system.
In April 2014, the RBI also restrained the banks from issuing guarantees to offshore joint ventures and subsidiaries of Indian companies to avail foreign currency loans to repay rupee credit.
Earlier, Indian companies in manufacturing, infrastructure and hotel industries were permitted to raise a maximum of $10 billion from this route. The maximum permissible ECB that could be availed of by an individual company was 75% of the average annual export earnings realized during the past 3 financial years.
Typically, an Indian company’s overseas subsidiary approaches an Indian bank for a guarantee or letter of credit to use it for availing loans from another bank there. Banks were permitted to issue non-fund based credit to overseas subsidiaries of Indian companies up to 20% of unimpaired capital of the bank.
The step by RBI has come close on the heels of warning the banks against issuing letter of credit and guarantees to Indian companies’ overseas subsidiaries. It said that such non-fund based credit was being used for purposes other than the business the company is involved.
The restrictions are applicable in cases like take-out financing, infrastructure financing and spectrum allocation and other repayments. The direction were issued under sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999).
The ECB loans are much cheaper than the domestic loans and therefore companies use the arbitrage available to their benefit.