India's IDBI Bank Ltd is pushing investors of $140 million of its bonds to accept a controversial change in terms that grant the state-run lender the right to write down the debt or convert them into shares.
IDBI is seeking the change for the Basel II-compliant bonds sold in December of 2012, which have no maturity but are redeemable in 10 years. The lender wants to make them compliant with newer Basel III capital norms, according to a letter sent to investors seen by Reuters. It asks investors to provide permission within 30 days of receiving the communication.
Yet the letter, dated Jan. 30, makes no mention of any additional compensation to investors, sparking outrage about what is seen as a brazen attempt by a lender to force through changes unfavourable to the holders of the debt.
The letter comes as critics are denouncing Basel III-compliant bond sales from Indian banks as offering excessively low compensation without enough explanation about the risks.
Indian banks need to raise at least 5 trillion rupees ($79.97 billion) in capital to comply with Basel III norms by March 2018, at a time when the sector continues to struggle with bad loans and weak profitability.
Banks are thus seeking to keep their borrowing costs down, but some analysts worry mispriced Basel III bond sales create more systemic risks in the sector.
"This is not a banana republic," said an official at a domestic institution that holds the IDBI bonds under dispute.
"This is a pure breach of trust. We are not keen to convert these bonds to Basel III. Let them buy back or extinguish the bonds and issue a new tranche," he added.
When contacted by Reuters, IDBI Chairman and Managing Director M.S. Raghavan said the lender was ready to offer additional compensation, while noting investors had the option to hold onto the debt under existing terms.
"We are not going to forcibly convert these bonds. It is only an option that we are trying to judge from the investor," Raghavan said.
"If the letter sounds like we are not giving them any option then we will edit and resend the letter."
However, the investor at the domestic institution said on Thursday he had not been contacted by IDBI beyond the letter. Another investor told Reuters on Wednesday he had also not been informed about alternative options by the lender.
"If you go by the letter, it is simply imposing a completely new structure without mentioning