IFR Editor-at-large Keith Mullin
JUST BACK FROM Mumbai, where I chaired IFR’s latest Indian Capital Markets Conference. I’ve been hosting the event for years now. It’s always a great opportunity to capture the mood of the market, sense-check sentiment and hear the great and the good of the local banking and capital markets articulate their thoughts and feelings.
Once again, we brought together a fabulous gathering of senior market professionals. It’s always a pleasure to spend time in India’s bustling financial centre hanging out with its affable and urbane market professionals. This year, the eve of the conference coincided with the break of the monsoon and the rain and thunder rolling in from the Arabian Sea were greeted with palpable relief by fractious Mumbaikars.
India Inc will be hoping that some of that relief can find its way into the broader economy. My “IFR Conference India Confidence Indicator” (which I would call the ICICI but someone’s already taken that) is probably at its lowest in all the time I’ve been travelling to Mumbai. And that straddles the pre-financial crisis bubble years, the Lehman period and the time since.
It’s hardly scientific; it’s my summary of the confidence expressed by our panelists and delegates plus anecdotes and chat on the conference sidelines and in the swish cocktail bars of South Mumbai. The indicator is trending distinctively lower this year; people seemed demoralised and disheartened. In light of the issues out there, you can understand why. Here (in no particular order) are some of the many issues that came out of conference discussions:
- Policy paralysis very much intact, with next year’s general elections acting as a further disincentive to act ahead of expected change
- GDP growth sub-5% in the first quarter and 5% in the last fiscal year versus 9% until a couple of years ago with the outlook gloomy
- A rupee that breached the key psychological trigger of Rs57 on June 6 versus Rs39.29 in January 2008.
- A potent mix of the two points above threatens to push companies struggling to meet expensive foreign currency debt redemptions over the edge
- An expected corporate funding deficit that will leave some borrowers badly exposed
- Billions of dollars of debt in the Corporate Debt Restructuring Mechanism.
- A growing sense of doom as to whether the US$500bn of infrastructure funding in the current programme supposed to come from the private sector will materialise
- A banking sector heavily exposed to infrastructure, hamstrung by massive concentration risk and saddled with rising levels of bad debt
- A banking sector since April 1 on a timeline to achieve capital ratios that the RBI has fixed above the Basel III minimums, creating a capital shortfall of around US$88bn (not counting the potentially serious impact of the above); up to US$57bn from non-equity instruments
THAT’S A GRIM list but it would be a mistake to summarise all the conference chat as negative. So what are the plus points? The RBI’s plan to grant new banking licences has certainly created a frisson of excitement. In light of all of the macro-negatives and strict conditionalities, you’ve got to wonder why, but there’s a long list of august entities looking to bid. It includes Religare; JM Financial (in which Vikram Pandit just acquired a small stake); infra companies L&T Finance and IDFC; corporate behemoths Tata, Reliance, Birla, Mahindra & Mahindra, Spice Global; Murugappa, Manipal and Piramal; Shriram Transport Finance; and microfinance players Janalakshmia Financial Services (founded by former Citibank derivatives banker Ramesh Ramanathan) and SKS Microfinance.
My “IFR Conference India Confidence Indicator” is probably at its lowest in all the time I’ve been travelling to Mumbai
In capital markets, India DCM has been the sweet spot this year. YTD volumes are running at around US$32bn, 70% of which is in rupees while international issuance is up 250% relative to the same period of 2012 driven by a positive funding arbitrage for top-tier issuers and a huge bid for yield.
ALONG WITH THE heady volumes, we’ve also seen some innovation and novelty. On the day of the IFR conference, RBI re-opened the domestic inflation-linked bond market after an absence of a decade with a US$176m-equivalent 10-year offering. Expect up to US$2.6bn-equivalent in linkers in fiscal 2013–14.
Elsewhere, the move to Basel III compliance has set in train efforts to test the waters on capital issuance with domestic investors. Efforts are embryonic at this point and are focused on creating comfort around the notion of permanent write-down or conversion features.
While the likes of SBI and ICICI are planning dollar issuance to capture the benefits of the strong cross-border bid and to avoid cash and liquidity reserve constraints, United Bank of India had another go a week or so ago at kick-starting the local market with a smallish Tier 2 rupee offering. Reactions were lukewarm but it’s worth remembering that investors in Europe and elsewhere in Asia initially turned their noses up at contingent capital but it’s now a relatively accepted part of the funding toolkit.
There have been slim pickings in corporate IPOs, but the combination of regulations requiring issuers to achieve minimum 25% free-floats and the ongoing privatisation programme (witness power company NTPC’s US$2.1bn issue) has kept the market ticking over.
We’ve seen innovation in ECM, too. But I do wonder if the new SEBI scheme to protect retail investors in equity offerings from price declines by embedding buy-back options which will be triggered if stock falls below the offer price six months after pricing is an innovation too far. Just Dial’s US$165m-equivalent IPO a couple of weeks back was the first to incorporate the feature. It’s a bizarre concept with a typically over-engineered ‘Made in India’ feel to it that puts issuers at the mercy of stock market volatility. But let’s see …
So are the positives believable and do they provide counterbalancing ballast to my shortlist of negatives? Is it a question of sell in June but come back soon? Well, on the latest IfrCICI reading and the depth of problems confronting the country, I sense trouble so I’m playing with extreme caution. Update after next year’s conference.
