Govt may allow companies like ONGC, IOC, GAIL, HPCL, BPCL, SAIL to issue long-term bonds backed by sovereign guarantee
In an attempt to finance the ballooning current account deficit (CAD), the finance ministry is planning to ask state-owned companies, namely ONGC, IOC, GAIL, HPCL, BPCL and SAIL, to raise money abroad through long-term bonds backed by sovereign guarantee to the bond issuer.
Working out an action plan to fund the CAD, finance minister P Chidambaram lhas said, “We will ask some public sector companies to raise money abroad”. Sources said that apart from these blue-chip PSUs, the finance ministry is likely to allow state finance companies, such as IIFCL, PFC and IRFC, to raise money through long-term bonds. The option to allow public sector banks is also on the table. Although the government has not decided how much each of these companies will raise, it has kept the target at $20 billion through a combination of these bonds.
At a recent press conference, the FM had also said the government was looking at further liberalising the foreign direct investment (FDI) policy, relaxing external commercial borrowing (ECB) norms and attracting investments from sovereign wealth and pension funds as well as non-resident Indians (NRIs).
The ministry is considering a strong balance sheet, repaying capacity and blue- chip companies with large capital requirements as some of the parameters. Another official added that petroleum refiners, such as IOC, HPCL and others, are stronger candidates as they have export earnings, which provide security at the repayment time of such bonds.
Similar bonds were examined by the ministry in April this year for ONGC Videsh, which has a credit rating of BAA2/ BBB- issued 5- and 10- year bonds of quasi-sovereign nature worth $800 million at 210 basis points over comparable treasury bonds.
Last month, state-run Indian Oil Corporation (IOC) raised $500 million via a 10-year dollar-denominated bond, which was priced 322 basis points over comparable US treasury bonds. In October last year, Bharat Petroleum Corporation (BPCL) sold a $500 million bond for a 10-year tenure, pricing it 290 basis points above the US treasury.
India’s current account deficit, which touched an all-time high of 4.8% of GDP last year, has triggered a near-10% depreciation of the rupee in the new financial year. The imminent withdrawal of the quantitative easing in the US has exacerbated funding concerns.
Apart from the recently announced FDI reforms, the government has imposed more curbs on gold, and is mulling restrictions on non-essential imports to shore up forex reserves. Sources say the ministry is also working on the possibility of long-term investments to be brought in through sovereign wealth funds (SWFs), which provide more stability as they have a long-term view.
In the past, State Bank of India in 1998 and 2000 raised foreign funds through Resurgent India Bonds and Millennium Deposits. The government had backed the bonds and also took on exchange rate risk to make the issues attractive. It is confident that its efforts will encourage steady flows, enough to finance CAD of about $90 billion, and there will be no need to tap into the forex reserves.
“In 2011-12, the government had to use the reserves to fund the CAD. We not only fully and safely financed the CAD of about $88 billion in 2012-13, but also added $3.8 billion to the reserves. This year, again, I promise that we will tackle the deficit,” said Chidambaram at the press conference. Sources say the ministry is likely to finalise the list of PSUs and the timeline soon, but it is currently doing a risk-benefit analysis on the concerns raised by various economists and RBI governor D Subbarao. The finance minister acknowledged the Reserve Bank’s apprehensions on sovereign bonds “deserves weight”, but quasi-sovereign bond issues were doable, and PSUs, most of which had strong balance sheets, might be asked to take that route, the FM added.
These bonds will not only provide support to falling rupee, but also work as a means to fund India’s large infrastructure needs.
Cad scan
* Although the government has not decided how much each company will raise, it has kept the target at $20 billion
* A strong balance sheet, repaying capacity and large capital requirements are some of the qualifying parameters
* An official said that petroleum refiners are stronger candidates as they have export earnings, which provide security at repayment
In an attempt to finance the ballooning current account deficit (CAD), the finance ministry is planning to ask state-owned companies, namely ONGC, IOC, GAIL, HPCL, BPCL and SAIL, to raise money abroad through long-term bonds backed by sovereign guarantee to the bond issuer.
Working out an action plan to fund the CAD, finance minister P Chidambaram lhas said, “We will ask some public sector companies to raise money abroad”. Sources said that apart from these blue-chip PSUs, the finance ministry is likely to allow state finance companies, such as IIFCL, PFC and IRFC, to raise money through long-term bonds. The option to allow public sector banks is also on the table. Although the government has not decided how much each of these companies will raise, it has kept the target at $20 billion through a combination of these bonds.
At a recent press conference, the FM had also said the government was looking at further liberalising the foreign direct investment (FDI) policy, relaxing external commercial borrowing (ECB) norms and attracting investments from sovereign wealth and pension funds as well as non-resident Indians (NRIs).
The ministry is considering a strong balance sheet, repaying capacity and blue- chip companies with large capital requirements as some of the parameters. Another official added that petroleum refiners, such as IOC, HPCL and others, are stronger candidates as they have export earnings, which provide security at the repayment time of such bonds.
Similar bonds were examined by the ministry in April this year for ONGC Videsh, which has a credit rating of BAA2/ BBB- issued 5- and 10- year bonds of quasi-sovereign nature worth $800 million at 210 basis points over comparable treasury bonds.
Last month, state-run Indian Oil Corporation (IOC) raised $500 million via a 10-year dollar-denominated bond, which was priced 322 basis points over comparable US treasury bonds. In October last year, Bharat Petroleum Corporation (BPCL) sold a $500 million bond for a 10-year tenure, pricing it 290 basis points above the US treasury.
India’s current account deficit, which touched an all-time high of 4.8% of GDP last year, has triggered a near-10% depreciation of the rupee in the new financial year. The imminent withdrawal of the quantitative easing in the US has exacerbated funding concerns.
Apart from the recently announced FDI reforms, the government has imposed more curbs on gold, and is mulling restrictions on non-essential imports to shore up forex reserves. Sources say the ministry is also working on the possibility of long-term investments to be brought in through sovereign wealth funds (SWFs), which provide more stability as they have a long-term view.
In the past, State Bank of India in 1998 and 2000 raised foreign funds through Resurgent India Bonds and Millennium Deposits. The government had backed the bonds and also took on exchange rate risk to make the issues attractive. It is confident that its efforts will encourage steady flows, enough to finance CAD of about $90 billion, and there will be no need to tap into the forex reserves.
“In 2011-12, the government had to use the reserves to fund the CAD. We not only fully and safely financed the CAD of about $88 billion in 2012-13, but also added $3.8 billion to the reserves. This year, again, I promise that we will tackle the deficit,” said Chidambaram at the press conference. Sources say the ministry is likely to finalise the list of PSUs and the timeline soon, but it is currently doing a risk-benefit analysis on the concerns raised by various economists and RBI governor D Subbarao. The finance minister acknowledged the Reserve Bank’s apprehensions on sovereign bonds “deserves weight”, but quasi-sovereign bond issues were doable, and PSUs, most of which had strong balance sheets, might be asked to take that route, the FM added.
These bonds will not only provide support to falling rupee, but also work as a means to fund India’s large infrastructure needs.
Cad scan
* Although the government has not decided how much each company will raise, it has kept the target at $20 billion
* A strong balance sheet, repaying capacity and large capital requirements are some of the qualifying parameters
* An official said that petroleum refiners are stronger candidates as they have export earnings, which provide security at repayment
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