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An issue of bond, bonding and a win-win game

A N Shanbag assesses the Resurgent India Bonds

While presenting his maiden Budget, Yashwant Sinha acknowledged that the community of non-resident Indians constitutes a huge, untapped resource which can be constructively utilised for India's development. He went on to add that NRIs would welcome new initiatives in this regard and will contribute meaningfully to the progress of the country of their origin.

On August 5, 1998, the first such initiative will surface in the form of State Bank of India's Resurgent India Bonds. The RIB is a five-year foreign currency denominated bond for which NRIs, overseas corporate bodies and banks acting in a fiduciary capacity on the behalf of NRIs/OCBs would be eligible to invest.

The bonds would be denominated in three major foreign currencies: US dollar, pound sterling and deutsche mark.

Currency	Denomination	Minimum Subscription	Multiple Thereafter	Interest Payable 6 monthly	Annualised Rate
US Dollar	1000, 5000 10000, 50000	2000	1000	7.75% p.a.	7.90%
Pound Sterling	500, 1000, 5000, 10000	1000	500	8.00% p.a.	8.16%
Deutsche Mark	1000, 5000 10000, 50000	3000	1000	6.25% p.a.	6.35

Interest is payable half-yearly either on a regular or a cumulative basis at the option of the investor. Such interest would be paid in the currency in which the RIB is nominated. After a minimum holding period of six months, the RIBs can be prematurely redeemed on a non-repatriable basis in Indian rupees without any penalty whatsoever.

In such cases, conversion of the foreign currency into Indian rupees would be carried out at the telegraphic transfer buying rate of SBI prevailing on the date of encashment.

In the case of joint holding (maximum 2), the second holder can be a resident Indian, but in the case of the account devolving on the second holder due to death of the first holder, the amount will not be repatriable.

Tax treatment:

RIBs are entirely exempt from Indian income tax and wealth tax. These are also exempt from gift tax but now that gift tax has been abolished completely, this benefit has been rendered redundant. Premature encashment of the RIBs in non-repatriable Indian rupees is also tax-free. The tax concessions would continue to be applicable to original investors even after they return to India and also to holders in due course, that is, transferees, donees and successors, even if they are residents.

The coupon on a dollar denominated RIB is 7.75 per cent compounded semi annually (or, 7.90 per cent per annum). This is when the six-month London Inter Bank Offered Rate is at 5.75 per cent and the American Certificate of Deposit rate is 5.23 per cent per annum.

As regards safety, SBI is India's premier commercial bank, holding aggregate deposits of about $ 33.19 billion. The funds collected through RIBs will be mainly utilised for development of the infrastructure sector in India.

It is widely known that once the infrastructure is in its place, India will fast grow into an economic power to contend with -- not withstanding Moody's rating.

As regards national security, India has become safer than ever before, thanks to the Pokhran nuclear tests. It is always a good strategy to exhibit your capabilities to solve a problem to ward off the possibility of its emergence.

As regards liquidity, banks will be permitted to grant loans against the collateral of the RIBs. RIBs can be redeemed in equivalent Indian rupees after a holding period of six months without any penalty. Again, these can be transferred from one person to another without any difficulty. If the holder in due course is an NRI, he can repatriate the interest as well as the redemption value.

As for exchange risk, the interest as well as the redemption will be in the same currency of the original investment and, therefore, the risk is zero.

Obviously, this is too good an opportunity to miss. Surely, investors all over the world would be interested in the RIBs. But the bonds are open only to NRIs and OCBs.

So, if I were a foreign bank or an MNC, I would catch hold of some NRI having investible funds of say, Rs 1 million. I would give him a loan of Rs 9 million against the collaterals of these bonds. The NRI will definitely be well rewarded for lending his name. Both of us will have a predictably certain windfall gain!

Well, frankly, this is not my own idea. As per some market reports, certain large banks and MNCs are waiting in the wings to pounce on the bonds. This is ingenuity at its best; a win-win situation for all parties concerned.

Given the impeccable safety and high returns emanating from the above arrangement, considerable funds are expected to be pumped in from these quarters in the RIB issue.

Ergo, there is every possibility that the issue might close on the earliest closing date. This may or may not happen, but for abundant precaution, the retail investor would be well advised not to wait for the last date of the issue for making his investment. For if he does so, there is every chance that he might miss the boat altogether.

Amongst non-residents across the globe, Indians have almost always shone the brightest because of an inherent dexterity and a multi-professional and multi-technological expertise.

Therefore, NRIs have always been a most respected and sought after resource over the world. Today, the NRIs have become an affluent group which has a participation in the world economy. According to one estimate, the combined wealth of NRIs should be close to around $ 300 billion!

However, as is wont with most professionals, a preoccupation with work leaves little time on hand for carefully studying investment opportunities. A little objectivity will make NRIs realise that they would be doing themselves and their motherland a great favour by using their investment funds optimally to extract maximum mileage.

India, especially after liberalisation, has been providing lush green pastures for investment. Instances are numerous -- the returns on earlier bond issues have been attractive by any standards.

					Amount Invested : US$ 5000
Bond Name	Issue Price Rs.	Allotment Date	Exchange Rate Rs	Maturity Date		Exchange Rate Rs.		Maturity Price $	Maturity Price Rs	Returns %
NRI Bond 1998	7700	15/3/89	15.40	1/4/96		33.90	10936.90		370760.91	25.01
NRI Bond 1990	98050	1/4/91	19.61	31/3/98		39.48	10580.45		417716.16	23.00
IDB-I	129950	15/1/92	25.99	14/1/97		35.72	7952.60		284066.87	16.93
IDB-II	131300	15/2/92	26.26	14/2/97		35.83	7952.60		284941.65	16.76

Nevertheless, the last quarter has been an upheaval of sorts for the Indian economy. The international community has been swift and decisive in condemning the Pokhran nuclear tests.

First there were the sanctions and then the sovereign downgrade by international rating agencies. The consequences on our economy were significant.

There was a large-scale migration of funds led especially by the FIIs. The stock market which was just about recovering touched a two-year low. There is wide spread panic and apprehension about the after-effects of the sanctions. Surely, this fear of the unknown may hurt than protect.

The finance minister had stated in his Budget speech that whenever he travelled outside India, NRIs have expressed a sincere desire to contribute meaningfully to the development of India. Well, the time has come to prove him right.

Firstly, the RIB issue is an attractive investment indeed. Secondly, the success of this issue would send a strong signal that India is a resilient economy and Indians have complete faith and loyalty towards their country.

Even as far as the domestic economy is concerned, the resultant forex inflow, while boosting the liquidity in the system, would also ease the pressure on the rupee. The time has come to demonstrate to the international community that India is not dependent on their assistance and offerings to sustain its economy.

We are well capable of raising and contributing to the flow of resources for our country's development. The RIB is a means to this end.

Resurgent India Bond would be available for one month from August 5 to September 5. If a retail investor decides to wait and watch, he may miss the boat. The earliest closing date of the issue is August 17. I am sure that the SBI would not desire to take the risk of accepting whatever comes into the kitty because a prudent banker is well aware of the servicing cost and does not eat more than what he can digest. There is always tomorrow when he can order more food.