IFR Asia: With US interest rates going down, what are the benefits for issuers to raise external commercial borrowings from GIFT City? And what about offshore bonds?
Ganeshan Murugaiyan, BNP Paribas: As we move to a US$5trn economy, India has a very large financing need both for Indian corporates as well as multinationals looking at investing in India. To put it into context, if you just look at the renewable sector, we are looking at producing 500 gigawatts by 2030 and that will require approximately US$500bn in funding in the next seven to eight years.
The Indian market including banks and mutual funds are growing. But will there be enough to fund this growth of the economy? No. So we definitely need funding diversification, which is where the entire overseas capital, including the bond market, is important.
There is significant ECB activity from Indian corporates, and there is a shift to booking these ECBs under GIFT City because of the incentives in terms of withholding tax.
Regarding ECBs, we are slowly seeing a number of our peers setting up operations here. We already have a branch in GIFT City, and we have already booked several ECBs through the branch.
In terms of bonds, there is no kind of tax incentive today. I think what we are increasingly seeing is that all the bonds will have an INX-only listing, which is more beneficial from a tax perspective. And from a bond perspective, listing on INX is as good as listing in Singapore or any other market.
The high base rate is definitely a deterrent because corporates will always look at the cheapest source of funding. But there are a lot of segments of borrowers, like financial institutions, that look at the credit spread. Those borrowers are not looking at the absolute rate but a credit swap rate over the base rate. And most of them convert their fixed to floating rate, so the high base rate by itself is not necessarily a deterrent to all issuers. But it is for some issuers who would get cheaper funding onshore.
In general, the bond market offers a different liquidity, it offers a different tenor which will not necessarily be available in the loan market. So for all these factors, I think we need to encourage and develop the entire foreign currency bond as well as the ECB market. I think that is critical for meeting India’s ambitions.
IFR Asia: How is the offshore high-yield market shaping up for Indian issuers?
Sajal Kishore, Fitch: I think in the near term we are seeing the high interest rates play out. But over the past few years, we saw bond issuance from India pick up quite dramatically, particularly as China’s high-yield bond market started to slow down. 2021 was a record year in some ways. But, of course, the Ukraine war happened and then the high interest rate environment started to have an impact on offshore bond issuances. So, as Ganeshan was saying, issuers in India will look at the comparative pricing between the two markets. But clearly, the offshore markets have some advantages and tenor is definitely one.
We have already started to see some pick-up this year. This year has been a much, much better year for us than the last two years – we’ve seen an 18-year paper go out earlier in the year and a 20-year paper in the market at the moment. And these have been across the high-yield space as well as investment grade, and across different asset classes as well – renewables, roads, and it’s not just from India but we have also seen it in South-East Asia as well.
So I think it’s a reflection of where the interest rate outlook is now, with the Fed cutting rates and expectations of more cuts to come. There will be opportunities for more US dollar issuance. Having said that, we do recognise that there is a lot more competition domestically for funding. Certain institutions can be quite aggressive, such as the REC, which now has a 25% target to support infrastructure development.
But also, we’ve seen the multinational banks play a bigger role, especially in providing US dollar financing in the renewables space. When you move away from plain vanilla, solar, wind, to more hybrids and large-scale complex transactions, that’s where the foreign banks are playing a bigger role.
Now, the multinational corporation banks clearly have a more short-term funding horizon, so they will usually have a go-to-market clause at four to five years, which facilitates bank funding for the complex greenfield phase of these transactions. So this will also facilitate more US dollar issuances from India in the future. But having said that, there will still be competition from the domestic institutions as well as foreign institutions who are offering longer-term financing.
Also, the credit quality of Indian banks has also improved over the years as well as their ability to provide funding. For example, we used to only see SBI, REC and PFC play in the renewable market, but now we’re seeing a lot more second-tier banks also coming into that space.
This means corporates are in a good position now as they can choose which markets to go to.
IFR Asia: Since the new Reserve Bank of India regulations, do you expect there to be good demand from foreign investors that do not have an India licence to invest directly in green bonds through GIFT City?
Jay Kothari, DSP Asset Managers: Like everything else, there are always teething issues and other reasons for a demand-supply mismatch.
But I think we need to just take a step back to understand why green bonds exist in the first place. We are on the cusp of a catastrophe globally in terms of climate change and more and more money will be spent on renewables. So, I would not really worry about this current demand gap as it will come through.
India has pledged to a 2070 net zero target, which will require US$10trn. That already tells you that these green bonds are here to stay.
A lot of sovereigns, pension funds and other institutions have a commitment to reach net zero and and where will they look to invest? For countries such as China, Hong Kong, Singapore and India, money will flow in, not only in equities but bonds too.
Even if we double our energy needs, incremental demand could be met by renewables. The West cannot do that. So, net-net, I think it’s a huge opportunity. It’s a slow start, but there’s definitely there’s a lot of green shoots coming through.
IFR Asia: Vijay, is INX ready with all the systems for this, especially getting foreign investors directly into the sovereign green market? And how will this affect the corporate bond market?
Vijay Krishnamurthy, India INX: Very recently, RBI issued their green bond calendar so we have a very clear issuance pattern, which will automatically start developing interest. Additionally, we’ve also had frameworks and operational guidelines from IFSCA on who can or can’t issue, and who can or can’t bid on behalf of the end client.
With all the regulatory framework in place for the issuance of sovereign green bonds in GIFT IFSC, it really helps us as an exchange to go ahead and put across our framework, our guidelines and our systems in place. Having said that, because the bidding of the sovereign bonds exists in the domestic market and being a subsidiary of BSE India, INX already has the required systems.
We are already in the process of tweaking the system according to the requirements of the current rules, frameworks and regulations. Of course, there are certain operational aspects where we will need clarity coming from the regulators, with whom discussions are taking place.
On the second point about whether this would really pave the way for the corporate bond market at IFSC. The domestic market evolved from being a completely opaque market to one that trades a daily average of about Rs120bn–130bn (US$830m) of bonds.
Ultimately, liquidity is important for a company going to the corporate bond market.
On the primary side, so far so good. From 2021 to 2024 we have raised US$60bn, including around US$12bn to US$14bn of green bonds. The primary side has been good because of the incentives being provided such as reduced withholding tax, which means lower costs compared to going to Singapore or London.
With all these things in place now, it is very important that we look at developing the secondary market because if you really want to take it forward to the next level, it is the liquidity which will be one of the key factors.
At least with the IFSC-registered intermediaries who should now come forward, especially with their experience in the domestic market and getting the corporate bond market vibrant there.
As an exchange, we’ll be more than happy to provide whatever infrastructure is needed for somebody to come onto the exchange platform and do the transactions.
We also have a clearing corporation, so reporting of trades can be done on the exchange platform and these trade could be settled through the clearing corporations. It’s the first step that we would want to take and I think it’s very important for a thriving corporate bond market.
Pradeep Ramakrishnan, IFSCA: One small point I would like to add is that the other issue to consider when mentioning taxonomy and regulations is that transparency is important especially for allocations from sovereigns and pensions – it has to be clear there is no scope for greenwashing.
A lot of regulators, whether it’s the Sustainable Finance Disclosure Regulation or the European regulators, can come down very heavy on that. Once this is clarified, funding becomes much easier.
IFR Asia: Perhaps Pradeep you can shed some light on how you are looking at developing and deepening this market?
Pradeep Ramakrishnan, IFSCA: As far as regulations are concerned, it is important to note that regulations are all-weather. While certain measures can be brought out in a bearish market, largely regulations are all-weather.
I would like to delve into some of my domestic experience and share that with the audience. Going back to my Sebi days, we tried to do two things. One was we tried to introduce the Electronic Book Provider platform, which is unique to India. Essentially, enabling value to a particular bond issue, whereby the issuer gets the best price-time priority. So if there is an investor who is willing to take a bond at a lesser yield, that person should be given that opportunity. Of course when we made this mandatory for larger issues, there were some murmurs. But today, issuers willingly launch bonds on the Electronic Book Platform. This is one method to get true price discovery and that is one reform we brought in.
Coming to the secondary markets, one of the things which we brought in was called the Request for Quote, which requires you to transfer your OTC trades to an exchange platform. The Request for Quote platform does exist in some international markets but it is voluntary.
At the time I left Sebi, almost 30% of secondary market trades were happening through the Request for Quote platform. So maybe these are some initiatives that the regulator and the stock exchanges could try out.
Regarding ESG, the concept of a greenium, which was being talked about for some time has now lost its lustre. Presently, yields have either converged or the whole greenium concept has become non-existent. I was in Greece recently where the OECD made a presentation on how the concept of greeniums is possibly extinct for many new bond issues. Given that, this means there is no incentive for an issuer to print green bonds.
Yet businesses need to ensure that they are doing business in a sustainable manner. For hard-to-abate sectors, the transition financing ecosystem exists and our report from the transition bond committee is on our website and the IFSCA is working on a consultation paper, which will be made available very shortly. For other sectors, the green bond ecosystem exists, where we have adopted the international taxonomy, which is already yielding results.
The last portion of what we are talking about is greenwashing because greenwashing is something which actually can erode the credibility of a place.
When I was at Sebi we brought in certain dos and don’ts on greenwashing. As far as the IFSCA is concerned, we have just put out a broader consultation paper on greenwashing, so please give us your views. We want to adopt a principle and example-based approach to greenwashing, because it can be a moral call and it is important for investors to know that they are not taken for a ride.
IFR Asia: Ganeshan, you spoke previously about ECBs. What other debt-financing products and developments would you like to see from GIFT City?
Ganeshan Murugaiyan, BNP Paribas: Today, if you look at an ECB that is booked in Singapore, it is quite liquid in the secondary market, and there are investors from across the world, especially Taiwan and the Middle East. But, because the tax benefit of loans booked in GIFT City is not portable, the loans are not transferable without having a financial impact. So clearly, if you need to improve the booking of larger loans in GIFT City, we need to solve the liquidity in the secondary market. I think that would be one critical element because not everyone from Taiwan or Europe would set up their booking entities in GIFT, so there needs to be a way to address it without losing the tax benefit.
The second aspect is risk management because normally a lot of their loans are also insured internationally, and I think there are a lot of nuances when you look at insurance, and I think that is something we’ll need to work on to ensure that loans which are booked here can have the insurance because that’s all part of standard risk management practice for banks globally.
Of course, a lot of focus has been on the banks and institutional side, but I think one large element which could really take GIFT City to the next level is if we can get corporates here because why can’t GIFT City become like Dubai?
For that, I think you need to bring in a lot of products like cash pooling or supply chain management. Maybe we need a separate focus on how we can attract corporates to make GIFT City their global treasury or global cash management hub? This will lead to a whole host of products from transaction banking to the global markets. I think that can take GIFT City to the next level.
IFR Asia: Sajal, what kind of trends or funding structures do you expect to see in the infrastructure space given the push of the government on this sector?
Sajal Kishore, Fitch: Tenor is definitely being extended, which is reflective of the underlying long-term nature of these infrastructure assets with their underlying cashflows. This fits well for investments from pension funds and insurance companies. However, with longer tenors, there are some challenges in terms of FX risk and hedging but I think some issuers prefer that option.
Increasingly also, we are starting to see a lot more credit-protective features coming in. Previously it was just an interest cover covenant and now you have limitations on additional indebtedness or restrictions on dividends or cashflow waterfalls etc. So a lot more credit-protective features are being offered to investors and that support is probably opening up new investor classes.
A good example of that was during Covid when airports were one of the worst-impacted asset classes. Yet the Fitch-only rated Mumbai Airport successfully raised a highly structured transaction.
I think the other trend is that we’re starting to see private credit participation in a significant way. They are quite keen to tap solid assets with solid long-term fundamentals bolstered by the robust economic growth and rising middle class in India. This new investor class wants more structured transactions, and some of the corporates are now more open to offer that. Not all, but some are.
Also, what’s happening, which is a little unusual, is that we are starting to see private investors fund greenfield projects in India. Typically, greenfield projects don’t come to the bond markets as the negative carry makes them best placed for banks. Yet we’re starting to see a little bit of that happen. It’s still in the private ratings space at the moment where some investors are keen to take greenfield risk because they see the potential in those assets in the operational phase. That’s another area where we’ll probably see some development.
IFR Asia: What are some of the concerns around developing GIFT City as a talent hub?
Jay Kothari, DSP Asset Managers: One of the teething issues is talent. And this is also linked to my next point, which is the social life and the nightlife. When people go to Singapore or Dubai or any of the other hubs or aspirational places to work in, all of it comes as a package, right? That they want to go with their families or on their own. Compensation is extremely important. How do you make it competitive? How do you not make it, ‘Okay, fine, we’ll have a small branch in GIFT and then we’ll see how to do it.’ It doesn’t work that way.
So, either you are all in or all out, and that is something which is a mindset which will have to be created.
But apart from that, we always discuss the best practices which we see globally, and we try to encompass that. But net-net, whether it’s getting talent, compensation, the ecosystem which can get created, I think all of it is a work-in-progress, but we are very confident we’ll get there.
IFR Asia: The cumulative debt listings on the exchanges are close to US$60bn now. What drives issuers to list on INX and what does the future hold for listings on the GIFT City exchanges?
Vijay Krishnamurthy, India INX: Last quarter, we saw about 22 debt issuances, which is a record. Of course, there are multiple aspects for somebody to come and raise debt – cost of capital being the most important one and timing. Apart from these, it’s also about the transparency and the convenience.
Cost advantages in terms of the withholding tax is definitely one of the very key advantages. Apart from that, at India INX, the turnaround time is very fast. As soon as the documents get submitted to us, within 24–48 hours all the required approvals are provided. So if issuers want to raise funds we can help them out with a quick turnaround time.
Looking at the future of listings, liquidity will be one of the key factors. Although all the listed securities today at INX are available on the Bloomberg trading platform, is there a lot of trading happening?
I’m very confident that this is a thriving ecosystem. More importantly, what happened this quarter was that the entire ecosystem at IFSC was used. For example, the International Securities Identification Number got created at India International Depository IFSC and the custody was based at GIFT.
And now we have our homegrown credit rating agency who have opened an office at IFSC. The entire ecosystem is in place right now, which makes it a good launchpad for developing the markets further.
IFR Asia: What is needed to build scale at GIFT City?
Pradeep Ramakrishnan, IFSCA: In 2020, around Rs5trn (US$59bn) was being raised in the domestic bond market. Today, it’s almost Rs8.5trn to Rs9trn – it has almost doubled. During that period, we experimented with many things.
One important aspect of a bond market is liquidity. First, we started with price discovery and transparency; disclosures to investors; credibility; greenwashing when it comes to do’s and don’ts, and also bringing the retail segment. Very interestingly, during the last year, something unique happened in India. A lot of retailers started investing in unlisted bonds through fintech companies, so we brought a framework whereby a retail investor can also invest in the listed bonds, which took off. And that contributed to an increase in secondary market trading by retailers by almost 4% quarter-on-quarter.
As far as IFSC is concerned, as Vijay rightly said, we will bring in all our learnings but GIFT itself is a sandbox, right? This allows us to experiment even more. The financial market is very dynamic and keeps changing with lots of trends internationally. As a regulator we will continue to consult market participants, the market, the investors, and bring in the best practices and add value.
But what I can also tell you is that all the regulations will be exception-based. For example, when some bad practice happens, we cannot bring in a rule which impacts the entire industry – that is something we have learned domestically and will continue here.
To see the digital version of this report, please click here
To purchase printed copies or a PDF of this report, please email shahid.hamid@lseg.com
