India Masala Bond Roundtable
Investors prepare for
takeoff in growing
Masala bond market
In November, at the headquarters of the London Stock Exchange, Global Capital/Asiamoney
hosted a roundtable discussion with several leading industry participants about the Masala
bond market and its likely development. The discussion took place in the immediate aftermath
of prime minister Narendra Modi’s visit to London, which coincided with a commitment for as
much as £1bn of new rupee issuance to be listed on the LSE, broadening the market from the
early International Finance Corporation and other supranational issuance to the private sector.
The rationale for an offshore rupee bond market is clear: India, and in particular the central
bank, want to reduce India’s vulnerability to foreign currency borrowing, while also retaining
— for the moment — capital controls. For investors, offshore rupee bonds offer an opportunity
to gain exposure to the currency, the economy and, as the market matures, specific credits. But
the new market will face challenges, some logistical, and others about fundamental questions
of governance. How will the Masala bond market evolve?
Panelists:
Nikhil Rathi, chief executive officer, LSE plc
Arup Ganguly, founding managing partner, KNG Securities
Alvaro Lario, principal portfolio manager, head of EM
corporates and global SSAs, International Finance
Corporation
Ben Powell, head of funding, International Finance Corporation
Global Capital (GC): Before we talk about
the Masala bond market, let’s set the scene.
There has been huge international interest
in the government of Narendra Modi since it
came to power on a pro-business platform
18 months ago. How is the Modi administration doing, and what impact does that have
on the need for capital raising, particularly
debt funding?
Sumit Jamuar, SBICAP: You’re starting
with an optimist. The intent is there, and
the government of India and the regu-
Gowri Shankar, director, EM Eurobonds & MTN trading, Citi
Sumit Jamuar, chief executive officer, SBICAP UK
Spencer Maclean, head of debt capital markets Europe, Standard
Chartered Bank
Lillian Georgopoulou, London Stock Exchange
Moderator: Chris Wright, contributing editor, Global Capital/Asiamoney
lators have followed through in policy
and in the announcements related to it,
whether that’s on the capital market side
or elsewhere. We see that the feedback
given to the administration is taken into
account when they look at regulations.
The Masala bond is a classic example of
that.
Remember that India has 1.3bn people,
20 times the size of the UK, and operates
under a federal structure. India has a
central government with a very clear and
decisive mandate, the regulators are very
much respected by international investors, and domestic demand is driving
growth, rather than exports. A variety of
initiatives the government is undertaking,
such as Make in India, Startup India and
Digital India, are in the right direction.
But there needs to be a bit of patience and
expectation management about the pace
at which things will operate given the size
and complexity.
GC: India seems, within the broader emerging markets, to be in better shape than
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many of its peers. Is there a sense from the
international investment community that it
stands out?
Jamuar, SBICAP: What we hear from
investors is that India does stand out.
Numerous surveys are saying India
is the preferred investment destination. If you look at growth, the IMF
says that India is going to grow at a
fair clip, 7%-8% plus. If you look at
the demographic dividend that people
talk about, India will have a quarter of
the world’s skill force by 2020. It’s a
$2.1tr economy, expected to double in
size in five years, expected to have a
$30tr consumer market by 2030. You
are seeing liberalisation happening as
well, whether it’s railways, which was
a closed sector, now allowing 100%
foreign direct investment; defence
moving up to 49%; or another 15 sectors
that were liberalised last week. So all
this plays positively from an investor
perspective.
GC: We started with the optimist. Arup, do
you have the same view?
Arup Ganguly, KNG Securities: Look, I
think everyone agrees it’s going in the
right direction. But as a broker, it’s not
going fast enough, to be honest.
We speak to institutional investors
who have felt somewhat frustrated with
India in the past, for various reasons. If
you look at the Modi government, they
came through on a landslide victory:
they are the people’s party, there’s no
question of that. But when you inherit
a bureaucratic machine, it’s also about
getting that bureaucratic machine to go
along with you. That’s where the struggle comes and the tension arises.
Also looking at the federal system of
India, and specifically Modi’s position,
he is the prime minister of India; the
states pretty much run themselves.
More importantly, he doesn’t have control of the upper house so he can’t get
any legislation through. Those are just a
few of the tensions involved, so his job’s
not easy.
So all these things mean slow progress. But the fact that they passed
the Masala bond regulation is a great
BEN POWELL
International Finance Corporation
thing, and now it’s just a question of
who is first to dip their toe in the water.
Hopefully that will mean they start
snowballing and start to create a market
– because we need to create a market,
that’s the issue. There are a lot of things
to be addressed, such as governance,
before we have investors doing cartwheels.
GC: The IFC certainly did more than dip
its toe in the water with its Masala issues,
which we will return to. What does the IFC
think of India on a macro view?
Alvaro Lario, IFC: I am an emerging
market global investor, and on a relative
basis everything that could go wrong
in other countries has been neutral or
positive in India. They were not hit by
the fall in commodities, and oil coming
down has benefited them to a certain
extent, increasing fiscal revenue. They
have a lot of structural challenges, but
they are among the darlings of emerging
markets.
Their execution has been pretty good,
especially on a relative basis. They are
not in a middle income trap yet, as some
others are, but are still on the growth
curve. The administration has enjoyed
the benefit of positive sentiment
towards India, and they have capitalised
to a certain extent on that by passing
structural reforms.
Ben Powell, IFC: On the second part of
your question, about the impact on issuance, that has been important as well.
Not only Modi but Rajan [Raghuram
Rajan, governor of the Reserve Bank of
India] has been somewhat catalytic in
terms of the change in sentiment. Rajan
has been particularly open to capital
market liberalisation. An example is
the speed with which we got the Masala
approval: we’ve been trying for years
to get approval from the government
to issue onshore and offshore, and we
got it around the time of the change
of administration, when the rupee
was under significant pressure. Six
weeks later we were looking at our first
issuance. That’s important because we
had not had much of a response to our
requests previously.
We’ve raised $1bn: it’s a drop in the
ocean in terms of the foreign direct
investment potential. But it’s the
demonstration effect, which I think the
administration understood and grasped,
and allowed us to do it.
Gowri Shankar, Citi: The election two
years ago was probably one of the
most watched elections in the international community: among institutional
investors and real money, everyone
was watching the results. As soon as it
became clear it was a landslide victory
we saw everyone piling into Indian
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assets, in any way they could get access:
foreign exchange, non-deliverable
forwards, debt. All the big institutional
investors – and we deal with all of
them, pretty much – said “we just want
access at any size”.
The good thing is, they all stuck to
their positions, so they haven’t lost
hope. Two years down the line, they
could have thought: nothing is happening, but compared to other BRICS
countries India is either neutral or
positive performance-wise. If you look
at Brazil, its currency is 30% down,
China has devalued; India is 5% down
this year, which is very good compared
to other emerging markets. Once the Fed
hike risk passes away in December, we
hope there will be renewed interest in
emerging market assets, especially for
India, and it might be more compared
to other markets. We haven’t seen any
outflows from India yet, despite the fact
that all the emerging market countries
took a hit.
Powell, IFC: We see that in turnover of
secondary IFC bonds as well. We hear
about very little selling of considerable
size.
Shankar, Citi: All the big investors who
bought the initial Masala bonds, we’ve
seen small outflows here and there but
nothing of significant size.
Spencer Maclean, Standard Chartered:
If you look at the numbers in terms of
Indian rupee issuance running from
start of April to end of March, 2013
to 2014, there was a little over $40bn
worth of issuance. Modi came in on May
14, then there’s a considerable pickup
of issuance to $66.5bn. Whether you
tie that directly to him or the state of
the markets is your decision, but so far
for the six months running to the end
of September 2015, we’re at $30bn, so
we’re keeping pace with that pickup.
If you look at the public dollar sector,
so international bond issuance, from
2013 to 2015 it picked up from $14bn to
$18bn, whereas for the previous three
years it had been $8bn-$9bn, so there’s
a significant uptick there.
GC: Is your experience also that the
money has stayed?
Maclean, Standard Chartered: Indian corporates were among the first to diversify,
not just in Masala. If you look at euro
denominated bonds there has been a real
pattern of US corporates wanting to do it,
as you’ve seen with Apple. But far ahead
of the game was Bharti. Back in November 2013 it issued a €750m transaction
and came back in February 2014 and
tapped it. The reason it issued in euros
wasn’t just because of a lower coupon,
but because it was able to get the pricing
arbitrage compared to dollars. It was
therefore able to open its distribution
channels to dedicated continental
European money that is only available to
invest in euros. It saw the benefit of that
in terms of investor diversification.
This is why you will see others push
into the Masala, because if you can tap
into these trapped pockets of demand,
overall your funding curve is going to
improve. So their dollar curve tightened
significantly, outperforming the market.
They then came back towards the end
of 2014 with a dollar and a euro curve,
and this time the euros priced slightly
wide to their dollars but the whole curve
had moved in so much that they got a
far better cost then if they had stuck
doggedly to dollars.
Nikhil Rathi, LSE: Going back to the macro
picture, obviously the growth numbers
stand out, India being the fastest growing
G20 economy this year and forecast to be
the same next year.
There have been some significant
announcements on the reform front. The
recent announcements around lifting the
FDI caps in a number of key sectors, be
it railways or banks, have been positively welcomed, as has the insurance
bill going through early on in the Modi
regime, though I think it is important to
balance that with an assessment of those
reforms that are still going through the
process. There is a challenging democratic process to go through, as we are
seeing with land reform and the Goods
and Services Tax Bill.
Minister Jaitley [Arun Jaitley, minister
of finance], when he was here, was very
frank about some of the political challenges. He said that when he gave his
budget speech in the Indian parliament,
the one aspect of his speech that was
the most challenged in the Indian parliament, in terms of the heckling, was
the decision to lower business tax rates.
There is a range of constituencies that
the administration is trying to navigate.
Prime minister Modi and a number
of his ministers are very effective at
communicating to the international
community. We’ve had a number of
SPENCER MACLEAN
Standard Chartered
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Powell, IFC: FII has been quite crucial to
our issuance strategy. If we’ve been planning an issue, and there’s a potential
announcement of FII increasing, then
we’ve got to take a step back, because as
soon as there’s an increase, you find the
potential cash that was for IFC offshore
is being brought onshore. How much
of that is a potential hurdle for the
Masala market, as FII increases, and the
cash that has essentially been trapped
offshore that is a potential buyer base for
the Masala market finds itself with an
increased asset pool onshore?
ARUP GANGULY
KNG Securities
them come to London. Whether it’s minister Jaitley, minister Prabhu [Suresh
Prabhu, minister for railways] or the
prime minister or the RBI governor
himself, they are forceful presenters for
India.
Shankar, Citi: The government has plans
to increase bond limits for FIIs every
quarter by around $2.5bn, so they can
buy more and more government securities. Past increases in the limits have
been filled in the auctions.
GC: We heard the bankers say the money
that came in initially has so far retained
faith and stayed. From the brokerage and
investor side, is this your view too?
Ganguly, KNG Securities: It’s interesting,
the FIIs, we have met some very large
investors who aren’t FIIs. Big names.
Ganguly, KNG Securities: There’s a scarcity situation. There’s a wall of money
that wants to go to India, but actually
there isn’t that much to buy. So whatever you buy, you hang on to, because
you don’t want to let go of it: it’s the
only story in town.
One of my frustrations is that,
although I know there has been a lot
of work done in restructuring the way
FIIs [Foreign institutional investors]
and QFIs [Qualified foreign investors] work, it’s still quite difficult for
financial investors to get into India.
There aren’t that many opportunities.
You’ve got a Eurobond market that
is $100bn-$200bn, but in the grand
scheme of things is a very small market,
so of course the money that goes there
is going to be sticky. So I don’t know if
that’s a testament to people hanging on
because they want to hang on, or just
reinvestment risk.
Shankar, Citi: Those are the guys who got
into the IFC initial bond, because they
didn’t have local custodians, or for some
reason didn’t have access to the market.
When there was a wall of optimism
coming into the markets, they looked
around and realised they were late in
the game, so they bought what they
could find. The first thing that was easily
accessible was the foreign exchange, and
then because of the capital controls on
foreign institutional investors, there’s
also the non-deliverable markets, where
there is liquidity. Then they looked
around, and there are restrictions – for
example, up to three years FIIs were
not allowed to invest in government
securities, although it’s lifted now. For
the shorter tenor, there was no access. So
then IFC’s timing was perfect. There was
demand from across Europe, the US, Asia
– everyone wanting to get into it. Those
who didn’t have access to the market
bought these bonds.
Shankar, Citi: That’s a hurdle. As the
ease of access into the local market
increases, there are less opportunities
for the offshore bonds.
Ganguly, KNG Securities: It’s a flip of
the flows, isn’t it? Rather than trading
offshore bonds you are going to end up
trading the onshore bonds that now you
and the domestic investors can get into.
Shankar, Citi: The liquidity is there, in
the onshore market, that’s the perception from investors, compared to the
offshore market which is considered to
be less liquid because of the availability
of bonds.
Lario, IFC: We started ramping up our
programme in local onshore corporates this year, and I was surprised.
The corporate bond quota for foreign
investors – $51bn this year – was rising
until March: 65%, 70%, 80%. I thought
it would be completed very quickly and
that people would not be able to access
the onshore corporates. But instead,
it has remained very stable, and right
now investors who want local corporate
access can get it. I don’t know why it
stopped at 80% but it has remained
there since June. And that [continued
availability to invest onshore] is also
competition with the Masala market.
GC: That’s the backdrop. Within that,
what’s the rationale for building an offshore rupee bond market?
Jamuar, SBICAP: In India there is a broad
recognition that the bond market needs
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to be bigger and deeper. Offshore rupee
bonds allow overseas fixed income
investors who are not an FPI [foreign
portfolio investor] to have access to the
India growth story.
Investors are far more sophisticated
than certain issuers in managing their
FX risk. If you don’t have a natural
hedge, building a hedge becomes quite
a costly affair, and people have been
caught on the wrong side of it. For
regulators, that’s their biggest risk: that
suddenly you have an issuer or a whole
class of issuers who are exposed to a
currency which moves in an adverse
direction, and suddenly there is a
liability that is generated that they are
not able to manage. That is the other
attraction of offshore rupees.
Investors like the yield. In an environment where you have a negligible or
even negative yield in other markets,
it’s an attractive proposition.
Maclean, Standard Chartered: I absolutely agree that the removal of that FX
doubt makes it a lot more attractive for
an issuer. From the investor perspective
it’s a very good thing too. All too often
we are hearing from investors who are
looking at an EM borrower, and saying
I’ve got concerns about how they are
going to manage their FX risk. So it
benefits both parties.
GC: The IFC has been instrumental in
the development of this market. What,
in essence, is the point and the need
for it?
borrowers. India is our largest country
exposure – we have a huge amount of
business in India.
GC: And why London? What does the
London Stock Exchange offer as a venue
for offshore rupee bonds?
Rathi, LSE: Strategically for India, if you
look at the estimates of investment that
are going to be needed for infrastructure
and to support the growth in corporate
India over the next five years, they
range from $750bn to $2tr. Therefore,
it makes a lot of sense for India to have
hooks and connections into the major
financial centres of the world, because
the scale of investment that is going to
be needed is enormous.
Here in London, we have very deep
pools of institutional capital. Most
institutional investors have the ability
to invest through London, there are high
standards in our market, and we don’t
have issues in terms of governance that
you may see elsewhere.
Many issuers find when coming
through London that they get an
extraordinary degree of global profile.
When they are looking to do a programme over a number of years and
want to build their profile among the
global investor base, they often find
that London is a very good place to do
that. To the extent that there is liquidity
in the bond markets, London is very
much at the centre of that.
If you are looking for different types
of investor, you can tend to find those
pools of investors here in London. If I
think of some of the work we did with
Chinese green bonds when the Chinese
delegations were here for their state
visit, some of the awareness raising we
did; the People’s Bank of China chose
London for a major event because they
could reach specialist green finance
investors here. We saw similar interest
when the green finance IFC/Yes Bank
Masala bond partnership happened.
One of the objectives of this whole
programme is to attract new types of
investor into Indian infrastructure, some
that aren’t registered as FIIs. So some of
the events we have been running over
the last year, for example the railways
minister talking to UK pension fund
advisers and European long term money,
have met people who perhaps hadn’t
even thought about Indian infrastructure as an asset class, but are looking
for yield and struggling to get it in core
European markets. In London you can
reach those people quite effectively.
Lillian Georgopoulou, LSE: There’s also
the fact that we are on a different time
zone. London could be seen as complementing the Asian time zone and
investor base.
LILLIAN GEORGOPOULOU
London Stock Exchange
Powell, IFC: It’s about creating a
vehicle to bring international savings
into India. All the proceeds of our
bond issuance goes into India, into
our projects there. So for us it was
about creating a vehicle to tap into
this wall of cash, giving people the
access they didn’t have. It’s a triple-A,
Euroclearable, issued off our standard
MTN programme, so it’s a very simple
vehicle for people to have access to
Indian rupees, but with the added
benefit that we’re not just swapping
it out. It’s been kept in local currency
for our projects in India, providing
cost-efficient local currency for our
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Ganguly, KNG Securities: I was going
to say something similar. We looked at
opening an Asian office, thinking we
were missing lots of trading overnight.
But in fact, for India, all the trading was
happening at London time. You don’t
miss anything here: if you get to the
office at seven, that is when the Indian
market takes off. For whatever reason, the
India-focussed crowd is here.
to be worked through. But ultimately for
India it makes sense to have core price
formation for both Indian equity and
credit happening in India. London opens
after India, we are in a complementary
time zone, not one that is seen to compete
or opens before.
GC: The visit of prime minister Modi over
the last couple of weeks coincided with a
GOWRI SHANKAR
Citi
Shankar, Citi: I totally agree. We have
desks in Asia, in Europe and America,
but we see most of the action tends to be
based during the London market hours.
Unless there is something like a big
announcement by the Fed, on a normal
day most action tends to be during
London market hours.
Powell, IFC: We capitalised on that when
we established our new treasury hub in
London. You (Alvaro) are used to trading India in the middle of the night in
Washington… There are real operational
benefits from an issuance and trading
point of view in being here. We would
definitely attest to that.
Rathi, LSE: Ultimately we will see an
international financial centre developing in India. I think that’s the strategic
ambition. It will take time because there
is a whole series of public policy issues
number of announcements in this area. It
really did feel like the moment when India
showed its ambition for the market. Just
how important was it?
Rathi, LSE: Very important. There’s been
a lot of work on the India-UK financial
partnership over a number of years, and
it’s always been a challenge to make
the partnership concrete. This time we
actually got concrete developments and
a realisation of how the UK financial services community can work in partnership
with India to deliver their public policy
objectives.
It was also quite historic for the London
Stock Exchange, because in 315 years
of the institution’s existence, never has
a bond listing been cheered by 62,000
people in Wembley Stadium…
GC: Let’s take a step back and look at
some of the earlier deals in this market.
Ben, the IFC effectively launched this
market. Tell us more about what has been
learned along the way.
Powell, IFC: When we launched the programme we were met with huge demand.
It was a game of two halves. The first
half was driven by big US fund manager
involvement. But what we’ve seen over
the last year is more European interest.
We’ve seen the pension funds Nikhil
mentioned coming through in the deals,
particularly long-dated Masala deals,
and that has really taken us by surprise.
Some funds we have seen in our order
book have historically been exclusively
euro denominated, and now we are seeing
them in 10 year Indian rupee order books.
That’s quite a big shift.
We issued a 10 year Masala to fund the
Axis Bank infrastructure bond; this longdated demand helped us do that. And
we’ve done a five year bond to fund the
Yes Bank green bond as well.
Shankar, Citi: What IFC’s successful
issuance has done is establish an offshore
curve which never existed before. This
is important for dealers like us to trade
around. Before IFC’s entry into this market,
there were a few private placements, where
there was specific demand from investors
to get access into the offshore market, and
then dealers like us would work on the
trade, but with no liquidity around it. IFC
coming in has established a nice offshore
curve. For investors it’s a good reference
point to look at.
Ganguly, KNG Securities: And of course
for pricing new deals. There’s now a curve
to price off.
Maclean, Standard Chartered: In the
development of any market, a new product always needs to be led by a sovereign
or a supranational first. The importance
of the curve being set up is huge. Not only
is it good for IFC to do it, it’s very beneficial for everyone else.
Rathi, LSE: It’s been very impressive
watching IFC issuance over the last couple
of years. Each time IFC comes to market
there is an innovation in the issuance,
each time pushing the curve out even
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when there might have been others
cautioning about how far to go. Now here
in London we’ve got a curve: we’ve had
one, three, five, 10 year bonds all priced
successfully here, which provides a great
platform for the quasi-sovereign issuers
to come next. That’s what we’re hoping
to see.
GC: We have a host of different issuers
coming to the market, among them the first
private sector issuer, HDFC. Are these the
names we would have expected to see?
Ganguly, KNG Securities: I think so. It’s
always been financial-led. You see the
financials first, and the PSUs [public
sector undertakings], then hopefully over
time we see a broader range of corporates,
which as a foreign investor you can’t get
access to.
Ganguly, KNG Securities: Liquidity has
become a buzzword among investors.
You can get into something, but can you
get out of it? Are there market makers,
and is capital being committed to market
making and creating a price? Now we
know there isn’t capital being committed
to market making and it is getting less by
the minute. The only downside right now
is people cautioning about demanding illiquidity premiums, and that could affect
pricing.
Shankar, Citi: That is a very important
point in this environment. Dealers like
Shankar, Citi: For the corporates, you
mean?
GC: No, for the agencies, this second round
of issuance.
Shankar, Citi: We are not sure about that.
Rathi, LSE: On market making and liquidity, you have to be patient. It’s a challenge
because people want it straight away, but
it will be a function of how much paper
there is in the markets, and how much
can firms like Citi justify the commitment
that is needed.
NIKHIL RATHI
LSE PLC
Maclean, Standard Chartered: That’s the
ultimate goal. Investors ultimately want
to get into a real corporate. Corporates are
probably the third step down. IFC was the
first, and opened the door for everyone
else, and we will see it progress over time.
Shankar, Citi: Whereas IFC’s issues
allowed investors access to the currency,
corporate deals in offshore rupees will
involve taking a view on the currency and
the credit as well. It could be a completely
different investor base.
GC: What sort of reception do we think this
paper is going to get, assuming market
conditions are as they are now?
Lario, IFC: We are already invested in
most of these names onshore. We are committing to switching from some of these
onshore into their offshore issuances to
support them in Masala.
In terms of yield, we expect it is going
to be around the same levels. This is what
the issuers are trying to explain to their
management: if it’s a little bit up because
it’s the first issuance and there is a
premium, how much are we willing to pay
up? And we are hearing: not much.
This is the second round of issuances
where you get all the PSUs and quasi-sovereigns coming in to the market, clearly
with a push from the administration.
us provide the liquidity for all these IFC
bonds. There are five big dealers making
markets on two way prices through
the market hours, so that’s given the
confidence to investors that they can
get in and get out at whatever time they
want. How much of that will be translated
into the corporate offshore issuance?
I’m not entirely sure whether the banks
will commit the same amount of capital.
That will be a key consideration point in
whether this market becomes mature.
GC: Would you expect to be a market
maker when the next round of issuance
comes through?
We are now seeing second round products. This morning here we launched the
first India fixed income ETF, and you’re
seeing asset managers looking to create
products to target the fixed income and
Masala bond market through ETFs and
others, because there are some investors
who don’t want to pick a particular bond,
they just want to access the asset class.
We will see much more of that as more
of the issuance come through. There are
plenty of asset managers thinking about
this now.
Ganguly, KNG Securities: But to achieve
the underlying liquidity for an ETF, you
need to be able to get in and out of it
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quickly, and you haven’t got that yet. You
can have an ETF, but if the underlying
asset is not liquid, it’s a challenge.
Jamuar, SBICAP: Let’s put it in perspective. If you look at dim sum bonds, in
2009, there was $2bn of issuance, but by
last year it was over $75bn. These things
take time: building up the liquidity curve,
getting the market makers to come into
play. On top of that, you need a mechanism to allow passive funds and ETFs and
others to come in without hitting their
limits.
It goes back to the announcement
between the LSE Group and the State
Bank of India, advised by SBICAP, around
the creation of the FTSE SBI India Bond
indices. What we realised when we spoke
to investors was, when you look at India
as a fixed income representation on the
indices, it’s a minuscule number. So when
I go to my credit committee and say I need
to invest, they say that’s fine, follow that
tracker. It limits you. You may be bullish
on India but may not be able to put your
money to work in India.
We are looking to establish a credible
benchmark, whereby the likes of passive
funds will be able come in and use that
as something which will be part of that
market development mechanism. If all
these issuers come to fruition, that’s likely
to be more than the level dim sum was
when it was launched.
GC: It’s an interesting point about dim sum
bonds as it is natural to draw parallels,
though we have to remember that many of
the early investors in dim sum were making
a currency play, with a near guarantee that
it would appreciate. What can we learn
from the development of the dim sum bond
market?
Rathi, LSE: A couple of things. One, it
needs quite a high degree of strategic
commitment from the relevant authorities.
I certainly think in the case of the Masala
bond market, if the authorities in Delhi and
Mumbai are able to be very strategic about
how public sector agencies co-ordinate
their issuance, and think about how they
can support the building of a quasi-sovereign yield curve, with different agencies
coming at different maturities and different
benchmark sizes, that is quite important.
We saw a relatively high degree of co-ordination in the early stages as the RMB
offshore market was built.
Secondly, and this is encouraging, the
players in the London market are both
the well-established international banks
that are based here, but increasingly the
Chinese banks that are establishing here.
They are active in this market and are
SUMIT JAMUAR
SBICAP
looking to bring issues to market. They
are able to support the linkages between
China and London, and you are starting to
see that here with Indian banks, which are
getting much more active in the capital
markets in London. That should provide
an ecosystem.
Maclean, Standard Chartered: When pitching Indian corporates, there was a sense
that while they were looking to access the
market, there was a lack of conviction or
clarity. This was from within the issuers
themselves but also a lack of clear guidance from on high. As Nikhil says, with the
RMB market it felt very co-ordinated.
Ganguly, KNG Securities: It goes back to
the political and bureaucratic structure in
India. In China it’s one mind, one machine:
it’s a different planet.
I’ve never really understood China – it’s
always seemed opaque to me. There are
some places that are easier to understand
from a distance than others, and India is
easier to understand over distance than
China is or ever will be.
I don’t think India and China should be
compared the whole time. They are very
different animals. China’s industrial base
is 20 times that of India, it has a different
political system, the labour market is
different, everything.
Lario, IFC: But what is similar is that you
have a capital account that is controlled
and a currency where you have the
offshore and the onshore. That is why we
draw comparisons, more than the structure
of the economy.
Maclean, Standard Chartered: You can use
the history of it, and say how long has it
taken the dim sum market from the early
noise to where we are. At the moment we
are very much at the beginning of the road
with the Masala market, so we shouldn’t
expect this to run before it can walk. The
point is, has it started on the road? Clearly.
Is it progressing as we would expect it to?
I think so.
Ganguly, KNG Securities: We’re also in a
totally different macroeconomic environment to where we were when the dim sum
market began, in terms of liquidity and
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interest rates. I don’t think we can expect
the development of this market to mirror
that of dim sum.
offshore when the dim sum market began.
I don’t think we’re looking at anything that
massive for India are we?
Rathi, LSE: We have to be a little bit cautious in making direct comparisons. The
strategic imperatives in the development
of these two markets are somewhat different. In the case of China, the imperative
has been the internationalisation of the
RMB, and that has been the big strategic
policy goal. In the case of the Masala bond
market, this is about managing a macro-prudential policy objective from India,
which is corporates raising money overseas
in foreign currencies and therefore exposing the domestic economy to vulnerability
from potential foreign currency movements. India wants to manage that risk in
local currency. The internationalisation
issue is not front and centre.
In the RMB situation, hedging instruments were available internationally:
investors were able to buy into the bonds
they wished to, and hedge into whatever
currency they wanted to. That is less available with rupees. That might also point
to a different trajectory of development
between the two markets.
Lario, IFC: I wouldn’t say massive divergence, but onshore and offshore rates have
been correlated.
Shankar, Citi: That’s absolutely right. In
the underlying offshore rupee swap markets, the daily traded volume on average
is between $30m-$50m, compared to the
onshore market that is 10-30 times larger.
In the RMB market, the offshore market
liquidity is a lot larger. That allows for
bigger investors to get in and be confident
that there will be liquidity around.
Powell, IFC: That has implications on the
investor base as well. We found in offshore
RMB that investors can look at it in dollar
terms, and that arbitrage is possible,
whereas in rupees it’s very much the
currency exposure investors are after. With
India we don’t have to think about whether
we are looking cheap in dollar terms,
which is the consideration in offshore
RMB. You really get that long-term investor
looking for a currency view as opposed to
offshore RMB where it might be a cheap
alternative to dollars.
GC: There was also a huge divergence in
the effective yield between onshore and
Shankar, Citi: That’s one of the areas
where we find some hurdles for uptake
from a new offshore investor buying these
Masala bonds, because they trade off the
offshore curve at a premium to local government bonds. For a large investor with
access to the local markets, their position
might be that they would rather buy the
local paper at 2% higher yields, rather
than paying a premium and buying the
offshore bonds.
GC: In terms of challenges, we’ve touched
on liquidity and the question of whether
a greater freedom of access to onshore
impedes offshore. What other challenges
are we expecting?
Rathi, LSE: These issuances will target
investors who are not just looking for
macro exposure but also credit exposure,
and there will be a huge education job to
do on the India credit story, to get investors
really up to speed on individual names,
and the issues that surround evaluation of
credit. That’s also where London can play
an important part: we do have the ability
to raise profile and build awareness in the
investor community.
Ganguly, KNG Securities: The other issue
with India is corporate governance, and
the bad experiences investors have had.
When things go wrong, the rule of law
doesn’t always support them. This is
something India needs to give comfort on:
that if something goes wrong, investors
can feel confidence that they can enforce
their rights.
Rathi, LSE: That’s a really important one.
Another big development in the last few
weeks is the draft bankruptcy code, which
is in progress.
Ganguly, KNG Securities: But the fear is
by the time you’ve got to that point, you’ve
lost the game.
Rathi, LSE: The names that are coming to
the market first are marquee names and
also, certainly with HDFC, committed to
high standards of corporate governance.
Ganguly, KNG Securities: Maybe we
can get some sort of CDS market going
again. I doubt that will come back. The
Indian banks got quite stung last time by
issuing what they call the back-to-back
CDS offerings, especially for a lot of the
convertibles. Unfortunately, they ended
up wearing a lot of it because a lot of these
corporates defaulted. So I think there is
a reluctance to re-open the credit default
market there. As this market develops and
starts opening to corporates, there will
have to come a discussion as to whether
there’s some kind of credit hedging that
can be provided by the Indian banks.
GC: What specifically do you want to see?
Is it a question of more legislation and
regulation, or more a matter of enforcing
what’s already there?
Ganguly, KNG Securities: Last time the
banks were taking on risks they didn’t
understand. It goes back to the point
about education. It’s not just education of
investors – the Indian banks have been
learning as they’ve been going along how
some of these obligations work or don’t
work. There needs to be a better structure around all these things and a better
understanding.
Jamuar, SBICAP: It’s an issue which has
been recognised by the government.
People know it’s a problem and want to
address it. There is full intent on this,
so let’s see how it plays out. They know
that to have a deep market they have to
address these governance issues, but it
takes time.
Ganguly, KNG Securities: We need a regulator who is willing to take action, which
has not always the case.
Jamuar, SBICAP: One thing which was
very clear during the prime minister’s
visit was the talk about the ease of doing
business in India. There is a clear focus on
saying: what can we do to become better
and be better ranked?
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There has been a jump from 142nd to
130th, and that doesn’t factor in a lot of
initiatives that have taken place from
July to October. For instance, the new
bankruptcy code which is under public
consultation is about improving ease of
doing business in India. It’s top of their
mind; they are going to do things that
make it easier and they are listening to
concerns.
Shankar, Citi: Having these offshore
issuances under English law will alleviate
a little bit of concern.
Ganguly, KNG Securities: But all the
convertibles were done under English
law. The problem is you then have to go to
English courts for a solution.
GC: This point that it is getting a little
easier to invest in the onshore market
– does that in some way undermine the
rationale for the Masala bond market?
Ganguly, KNG Securities: Doesn’t it at
one point all become fungible? We all just
become one market?
Powell, IFC: Like dim sum, there are many
comments about convergence, the capital
account opening, and will that see the
death of offshore renminbi? Maybe that’s
the endgame.
GC: If we accept we are some years away
from the removal of capital controls and
convergence, in the meantime, does it
matter that there are two? Does it impede
appetite for one or the other?
Rathi, LSE: Ultimately it will depend on
price.
Ganguly, KNG Securities: There’s an appetite, it just depends on pricing. We’ve got
some headway…
In India there’s this real culture, a
historic thing, that bureaucrats have a real
bee in their bonnet about not wanting to
be under pressure from foreign debt holders. They hate it. But they need to borrow
money. So hopefully this Masala bond
gets around that cultural inhibition. They
hopefully will be happy with debt because
it’s rupee debt not dollar or euro debt.
Rathi, LSE: I think that’s right. There
should be space for both. The key challenge
is education about India credit, full stop.
Onshore, offshore, generally the market
needs to develop. Even the figures Spencer
gave at the very start, that’s still way off
what is likely to be needed in the next five
to six years if you look at infrastructure
financing needs. More so when you take
into account the challenges in India in
terms of the quality of bank loan books,
and the reform challenges for the Indian
public sector banking system, that creates
an even more acute need to access capital
markets, domestically or internationally,
and I think investors will respond to that.
Maclean, Standard Chartered: There
appeared to be a reluctance to want to come
to market. I think there is a growing understanding that they need to. In order to allow
guys lower down the chain to gain access,
it’s imperative the guys towards the top of
it don’t delay, that they get into the market
and do liquid benchmarks, because it
opens the entire market for everyone else.
Ganguly, KNG Securities: Look what’s
happened in the developed markets right
now. There’s been no issuance for three,
four, five years; liquidity has almost come
to a standstill because people are worried
about reinvestment risk; European markets
are doing nothing because there’s nothing
to buy or sell, everything’s too expensive.
It’s the same thing. Issuance is key to every
market, not just emerging markets.
Maclean, Standard Chartered: Ben, do
you just keeping tapping the same lines,
increasing the size of the issuances so what
you end up with is super liquid? Or do you
carry on populating the curve?
Powell, IFC: We always choose to tap an
existing line. Yes Bank is a good example
where we had a specific maturity we had
to match on the underlying assets; that’s
where we would establish a new line. But
generally we try not to leave too many
orphans in the market.
Shankar, Citi: It goes back to the liquidity
concerns we talked about. Big investors
especially prefer to invest in large issues
with large outstanding notionals. Their
criteria will be a minimum $100m-$200m
outstanding.
Powell, IFC: Establishing a new line is
the biggest challenge. You have to get to a
minimum size. When you get to $100m,
$200m, then you see the bigger tickets
coming through. That’s one thing we
learned from the offshore RMB market is
liquidity. It begets liquidity. We found that
with the large dim sum listed in London:
as soon as gets to that size, you can treat it
almost like a private placement and keep
tapping, tapping, adding to the notional,
and you find you can do bigger and more
frequent taps as you add. That’s an important takeaway for corporates coming to
market.
Ganguly, KNG Securities: With the big guys
you then also satisfy their concentration
risk restrictions. They don’t want to own
10% of a $20m deal, they want to be 1% of
a $2bn deal.
GC: One of the IFC’s bonds was for Yes Bank,
which captured a lot of attention from the
climate finance/green bond community.
What’s the potential of this market for
climate finance?
Powell, IFC: There is a big drive towards
green finance from corporates in India.
There was a real ripple effect caused by the
Yes Bank green bond. We are getting calls
from our existing clients asking: can we do
that too? Not only do you address the climate finance agenda of Modi, but you also
address the capital market development
side of it as well.
So we play a role in providing local
currency, which is important when it comes
to the Masala market, but we can also play
a role in advising clients on issuing green
bonds and the kinds of standards we have
imposed on ourselves when it comes to
managing proceeds and effective reporting
on those proceeds.
Lario, IFC: I’ve seen it in many markets,
in Brazil, in South Africa, in Mexico. When
you get to a certain degree of development
you start to see new products coming to the
market: structured finance, project finance.
If you try to do a $1bn project finance now
it’s impossible, but perhaps in five years
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you can see pension funds going in for
$50m tickets. So maybe in the medium
term, this will enable more products which
will help international investors get into
these markets.
Rathi, LSE: This will come. Overall globally,
the green bond market has tripled in size in
each of the last two years and is expected
to increase again this year. If you look at
India’s renewable energy target, it’s 175
gigawatts by 2020 starting from something
like 4GW of solar and 20GW of wind now.
There is a very long way to go, so being able
to target investors who are very focused
on adherence to green standards is a good
idea, and almost a necessity.
We hosted a conference on this with the
People’s Bank of China during President
Xi’s recent visit. This is a market globally
which, unlike other markets, could be led
by China and India, because of scale we are
talking about and the amount of finance
they need to raise for green investment.
Maclean, Standard Chartered: Clear lines
are emerging between what is a very wide
investor base. We talked about the Bharti
transaction, so you’ve got the continental
Europeans; you’ve got the growth of green
bonds funds and SRI bond funds, that are
only looking for certain types of assets;
you’re going to have those that only want
exposure to the currency. What India and
its corporates are going to need to understand is that there is a wide universe of
ALVARO LARIO
IFC
investors, and if it wants to raise the money
it needs to raise, it has to appeal to as many
of those investor groups as possible. If they
are reliant on one, it’s going to saturate that
market. Your price is going to suffer. There
will be price arbitrage that pops up by tapping into these individual investor bases.
And from a rating agency perspective, if
you are able to demonstrate you are able to
issue into all these pockets of demand, it’s
positive.
GC: How about the tax environment,
whether in terms of withholding tax on
offshore, or the lack of clarity on the tax
environment domestically? How much of an
issue is that?
Ganguly, KNG Securities: Withholding tax
fits into pricing. It depends on what an
investor’s funding cost is and how much
spread he’s making. It’s a factor, I’m not
sure it’s a deal breaker.
Shankar, Citi: It’s all about the pricing.
When an investor looks at a new market,
the first comparable they look at is the local
government market. If there is withholding
tax on that, they deduct that and then look
at the net yield, and compare that with
what’s on offshore issuance.
GC: So, in conclusion?
Jamuar, SBICAP: It’s very simple. People
have said they want the product, they want
access to the market. And we’ve talked
about the quality of issuers that want to
come to the market. The question is, let’s
see if investors put the money on what
they’ve said they desire.
Ganguly, KNG Securities: I might have
come across on the negative side of things
but I’m actually a complete India evangelist. We saw a lot of things go wrong in the
mid-cap credits during the last cycle of
issuance. Hopefully all the relevant parties
would have learnt from that experience
and this time around it will be completely
different. I think it’s exciting for everyone
this is happening. Hopefully it happens
sooner rather than later.
Shankar, Citi: I think the first non-supranational deal that we see will set the
milestone for future issuance. If for some
reason the first one is not oversubscribed,
that might set doubts in the minds of other
investors. That is very, very key. If the first
issue is a huge success it sets the tone for
future issuance straight away.
Powell, IFC: I was going to say the same
thing, and it comes back to co-ordination.
Does the regulator have a role to play in
co-ordinating issuance, so we don’t get
all the Masala issuers coming at the same
time? You even see that in the dollar
market: you get a wave of good deals, and
only one deal needs to go wrong and it can
shut the market for a long period.
Lario, IFC: Size, and how you communicate
size, is going to be very relevant. If the first
one or two are big, the remaining demand,
even if they are successful, is going to be
affected.
There is a certain total demand you can
get in a month – you’re not going to get
$3bn.
Rathi, LSE: There’s a lot of excitement and
expectation that things will happen in the
short term. It’s important to be realistic
and to think on a three to five year horizon.
There will be positive developments and
there will be bumps in the road. The Indian
fixed income asset class is going to move
from specialist to mainstream over the next
five to 10 years, and staying the course is
going to be incredibly important.
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