According to India Ratings, for an issuer with high quality credit profile, the foreign currency bond may appear more lucrative on an un-hedged basis than raising debt capital from the domestic debt market.
In an attempt to boost capital market, finance minister Arun Jaitley in his maiden Budget, proposed liberalising the ADR (American Depository Receipt)/GDR (Global Depository Receipt) regime to allow issuance of depository receipts on all permissible securities, a move that will encourage Indian bond issuers to raise more foreign currency bonds, says India Ratings & Research (Ind-Ra).
"The proposal to allow international settlement of Indian debt securities would further ease out the process. Indian debt issuers, who have been increasingly lured by foreign currency debt, may re-evaluate the option of tapping domestic bond markets over foreign capital markets," the rating agency said in its recent report.
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According to India Ratings, post this move; for an issuer with high quality credit profile, the foreign currency bond may appear more lucrative on an un-hedged basis than raising debt capital from the domestic debt market.
These foreign currency borrowings, if resorted to without hedging for currency and interest rate risks, provide significant savings to finance costs of companies in the short term. However, the finance cost gains are likely to be more limited if the foreign currency debt is hedged for the related risks, the report explains.
Hence, corporates with high credit quality, who tapped the domestic debt capital market to raise funds at rates lower than the base rate may now be most potential candidates for tapping the ADR/GDR route to raise debt funds from abroad, it adds.
Though moderate but, the Indian bond market has shown encouraging growth post 2010. This coincided with the introduction of base-rate by RBI from July 2010. But, Jaitley's proposal cost of rasing funds through ADR and /GDR would cheapen and despite the constraints posed by the RBI's external commercial borrowing (ECB) guidelines a significant debt volume could flow out of Indian debt markets, Ind-Ra adds.
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