Taste of China

Shalini S. Dagar        Print Edition: Nov 13, 2011

What is proposed? The Reserve Bank of India, or RBI, recently carved out an allowance of $1 billion from the overall limit of external commercial borrowings for so-called 'dim sum bonds' for Indian companies interested in raising such funds. Dim sum bonds are instruments which are denominated in the Chinese currency renminbi and are issued in Hong Kong. China opened this market to foreign issuers last year. Infrastructure company IL&FS reportedly aims to raise the equivalent of $200 million, and is likely to be the first Indian firm to issue renminbi-denominated bonds.

Advantages: Among the touted pluses are cheaper interest rates than those prevailing in India, and the fact that theoretically even unrated companies can raise remnimbi funds. Also, the dollar markets may not be accessible to many companies. But for the cautious, those are not compelling arguments. "There are no free lunches," says Prabal Banerji, CFO, Adani Power. "If one accounts for forward cover cost and exchange rate differential, optically cheaper rates can mean nothing."

Downsides: The big question mark over the dim sum bonds is the overhang of the "managed currency". The renminbi is not freely convertible and is pegged to the dollar. Given global imbalances and the direction of capital flows, it is quite likely that the renminbi will free float at some point in time. "It will be sooner rather than later, and when the peg goes it is quite possible that a rapid 15 to 30 per cent appreciation (versus the dollar) will happen," says Banerji. So clearly, debt repayment commitments in renminbi do not cut ice with him. He is clear that dim sum bonds should be an option of last resort for conservative companies.

Given currency revaluation expectations, the interest of investors and issuers in these bonds may not always match in terms of tenor and coupon, or the interest rate. Issuers are more inclined towards the shorter term. Deals are still being done, though. Recently, Malaysian sovereign fund Khazanah raised funds via this route. Also, given its nascent stage, the dim sum bond market still has significant liquidity issues.

Who will go for dim sums? "Either it is companies that have significant business interests in China and therefore a natural hedge against currency volatility. Or companies that are keen on diversifying their currency risk," says Zafar Syed, Head of Financing and Rates Sales Business, Deutsche Bank. For companies that have receivables and payables in renminbi, this avenue of fund raising may still be relevant. Large corporate treasuries may be interested in them as investors, where they would be extremely attractive instruments despite low yields.

According to bankers, most issuers will adopt a wait-and-watch policy for now. "Most companies would rather see the first few transactions, observe their performance in the secondary market and then raise funds themselves," says Manmohan Singh, Managing Director and Head of Debt Capital Markets at RBS India.

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