Public sector financial institutions India Infrastructure Finance Company (IIFCL), Power Finance Corp (PFC) and Indian Railway Finance Corp (IRFC) may find it difficult to raise the targeted $4 billion overseas funds within this fiscal as has been asked by the government, which is trying to bridge the current account deficit (CAD) by improving dollar flows into the economy.
Officials from these companies told FE on the condition of anonymity that the amount prescribed ($1.5 billion each for IIFCL and PFC, and $1 billion for IRFC through quasi-sovereign bonds to finance long-term infrastructure) is “a bit on the higher side for this fiscal” given global market conditions, where investors have a reduced risk appetite, and the high cost of borrowing and hedging. The projected amounts can be raised through bonds in more than one tranche, some of which may spill over to the next fiscal, official added.
“Unless there is clarity from the finance ministry over measures to keep the cost of borrowing from overseas markets low, it may not be feasible to fully adhere to the fund-raising plan. We should be given the freedom to get overseas fund tie-ups even at rates (basic rate plus hedging cost) higher than what we could get in the domestic market. We dont want being pulled up in the audit later,” a PFC official said, asking not to be identified.
The companies also maintained that given the global economic conditions, the finance ministry could have included more institutions to raise overseas money via quasi-sovereign bonds as it would have reduced the quantum to be raised by individual entities and provided a balanced distribution of risk among them.
“We cannot be forced into issuing these bonds if market conditions are not conducive. Anyway, most probably the money will be raised in small tranches and not at one go,” an official in one of these three institutions said. “The final decision will be based solely on the cost economics,” another official said.
PFC chairman and managing director Satnam Singh said bond issuances of such a large size would have to broken into tranches and launched with gap between two such similar issues. “But decisions on timing and quantum will be taken once we get clarity over the terms of this bond issue from the finance ministry,” he added.
The plans for raising this amount are expected to be firmed up over the next 8-10 weeks, during which these PSUs will also have discussions with the finance ministry to arrive at a “more realistic” amount that can be raised during this fiscal. “There is no clarity on the nature of the sovereign guarantee and other issues. We will soon take it up with the government,” a source in one of these three institutions said.
Analysts and consultants FE spoke to also raised similar apprehensions and pointed out that even after all these measures, the rupee hasn’t strengthened much. “The question now is, given the fact that investors are generally more risk-averse and with the general elections not too far away, will they (investors) take any risk in investing in these financial institutions, especially when power and other infrastructure sectors are facing huge regulatory-related delays?” a consultant said.
“If any of these bond issues get undersubscribed, the reputation of these institutions and the country will take another hit,” the consultant warned.
However, officials in IRFC and PFC said there has always been demand for their bond issues overseas. An IRFC official said their borrowing plan for the fiscal is R15,000 crore, of which around R10,000 crore will be through tax-free bonds and the rest can be through instruments such as quasi-sovereign bonds. IIFCL plans to raise R14,600 crore this fiscal, of which around R10,000 will be through tax-free bonds and the rest overseas.
IRFC and IIFCL officials said they are currently doing their homework on the cost of funds, including hedging costs, and added that the money will be raised from overseas only “as and when required”.
Param Sarma, director and CEO, NSP Forex, said interest costs on foreign currency borrowings with an average 5-year maturity period will be around 3% (including Libor plus spread) while the hedging costs for the same will be around 8% per annum, taking the overall cost of borrowing to around 11%, which is very high. At the same time, these financial institutions will be able to raise money from domestic markets at around 8% given the tax-free status of their bonds, he said, pointing to a 3% difference in overall rates (foreign versus domestic).
A PFC official agreed that together with hedging costs, the $500 million, the company raised through ECB came very close to the rate at which funds could be mobilised in the domestic market.
