Masala Bond: Is Oppn chasing a wrong cause?

KIIFB defends coupon rate with untenable comparisons: Experts

KOCHI: The Masala Bond has kicked up a lot of dust even in the political circles and the arguments and the counter arguments traded between the two factions – the Opposition and the Government – may have made a mountain out of a molehill.

The KIIFB has always been a political punching bag and the detractors of LDF and Dr Thomas Isaac always worked to pick holes in KIIFB arguing that the funds invested in projects initiated by KIIFB would invariably land the state in financial chaos since most projects undertaken by the Board are infrastructure related and hence incapable of generating returns sufficient to pay off the money KIIFB has been borrowing. (not to dwell on this issue now)

In the recent controversy surrounding the Masala Bond, the Opposition seems to be barking at the proverbial wrong tree. Nonetheless, the Government seems to be defending the opposition’s questions with misplaced arguments and in the process, the public is being reduced to mute spectators without knowing what the real issue is all about.

But equally inexplicable and even misleading was the way the KIIFB officials have resorted to debunk the Opposition charges against the involvement of the Canadian fund manager, Caisse de dépôt et placement du Québec (CDPQ) for its association with SNC-Lavalin or the alleged ‘high price’ of 9.72 per cent that KIIFB had to pay the investors in Masala Bond. In fact, the ‘devil’ is in the arguments.
[Even the KIIFB arguments and examples to justify the 9.72 per cent coupon rate have been found to be misleading and will be discussed in the latter part of this article].

Many argue that the doubts raised by Opposition are unfounded to a great extent. What is their real concern in this deal? Is Opposition trying to fault the poor rating of KIIFB or the high coupon it had to commit to the Masala Bond investors?

The Opposition seems to have seized the opportunity to raise the spectre of SNC-Lavalin (connection) once again in the bond issue, arguing that CDPQ is a shareholder in the former.

The argument carries no weight and defies all logic as it is not KIIFB that is investing in CDPQ and on the contrary, CDPQ had sought to invest in KIIFB bond. Though investors normally carry out due diligence in companies where they plan to invest, it is incomprehensible why the Opposition wants KIIFB to vet the credentials of an investor in its bond, and after all, CDPQ is not SNC-Lavalin.

What is the disqualification on the part of CDPQ to become an investor in KIIFB bond, a shareholder of SNC-Lavalin even if the latter is a tainted company, for argument’s sake?  But the issue may have been exacerbated by the statement by the finance minister Dr Thomas Isaac denying any relation between SNC-Lavalin and CDPQ, which is, unfortunately for Dr Isaac, is the largest single shareholder of SNC-Lavalin (as of December end, 2018) and this has certainly given the Opposition the much-needed ‘there-is-something-to-hide’ argument to clamour about.

It’s baffling that the Opposition leader expressed curiosity about how CDPQ managed to know about KIIFB’s Masala Bond issue in a clear manifestation of how ignorant some politicians are on such matters. It is a known fact that marketing team burns a lot of midnight oil to sell such bonds and normally an ideal marketing team would be in touch with all possible investors from all markets to make the issue a success.

At a press briefing on Tuesday in Kannur, Chennithala was seen visibly striving to prove that KIIFB had failed to get favourable rates for masala bond, citing wrong examples of masala bonds issued about four years back when the market rates were much lower than the current rates.

In fact, Chennithala could have easily driven home his point with a much recent and better example of HDFC masala bond that was raised at one percentage point less than that of KIIFB’s bond about four months ago.

In the case of the ruling CPM party or the government, instead of boldly ignoring the charges of ‘Lavalin connection’, the CPM Party secretary also said to have indulged in petty arguments, which once drooped to the level of daring Ramesh Chennithala to bring the funds required by KIIFB instead of badmouthing it.

There could be other reasons also why the Canada investor has taken the centre stage of the new debate. As a financial expert pointed out, there was no mention of Canada or any companies from Canada when KIIFB initially shortlisted markets for investor roadshows.

The last leg entry of CDPQ has set the needle of doubt pointing at a possible bailout exercise being orchestrated by the financially strong Canadian pension fund manager in order to save KIIFB and the Government from a possible disgrace – but views these as far remote chances.


KIIFB making untenable comparisons?

KIIFB kept arguing with the support of examples that the Masala Bond could attract good rates compared with other issuers. Not many companies have issued masala bond, which was first launched by IFC with an offshore bond programme in 2013, and followed by companies including HDFC, NTPC, Indiabulls Housing Finance etc.

During the height of the recent controversy, a KIIFB statement said, “As regards the international market, so far only institutions, which are rated at AAA by rating agencies, have entered the Masala Bond market. This is the first time that an entity like KIIFB with a rating of BB, below the rating of the Central Government at BBB- had attempted a bond of this nature.”

Talking to, Sriniwasan, a retired senior banker based in Coimbatore, said this is an effort in vain to compare apples with orange.

He said that the said AAA rating these Indian companies have been assigned with is from domestic rating agencies and the reference of KIIFB’s BB rating is from International rating agencies like S&P and Fitch, and these are not comparable at all.

“How can you argue that so far only companies with AAA rating have entered the masala bond market even as these are ratings that are not applicable to international bond issues? When it comes to international rating, these are companies with ratings comparable to that of KIIFB – maybe equal or one notch above or below,” he said.

The KIIFB statement also argued that while the government body like KIIFB has raised funds in the domestic market at 10.32 per cent (payable quarterly), other leading institutions like Central Bank of India (10.8 per cent), Indian Overseas Bank (IOB) at 11.7 per cent) and South Indian Bank (11.75 per cent) have raised funds during the period at much higher rates.

“It can therefore be seen that the rates at which KIIFB has raised funds are much lower than the rates at which many other institutions have raised in the domestic market over the last one year.”
Again this comparison also seems to be a misplaced one as the bonds issued by these banks carry different levels of risk for the investors compared with that of KIIFB.

According to I Unnikrishnan, an experienced chartered accountant and chairman of an NBFC headquartered in Thrissur, the bonds these banks have raised are subordinate debt or Tier 2 bonds that carry a lot more risk, which by definition can’t be compared to the risk attached to the funds raised by government entities like KIIFB or any such firms on commercial terms.

“Terms and conditions of Tier1/2 bonds must have a provision that requires such instruments, at the option of RBI, to be either written off (partially/temporary/permanent) or converted into equity upon the occurrence of a trigger event, called point of non-viability(PONV),” explained Sriniwasan.

This risk, according to him, is on investor and the risk premium is added to the interest rate pushing the eventual rate higher. “We normally describe this as premium for loss absorption features, which include the possibility of the investor suffering the loss of even the principal,” Srinivasan added while reiterating that the KIIFB bonds on the contrary are secured.

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