The turmoil in Hong Kong is an opportunity for India
Hong Kong’s future as a global financial center is less promising after China’s authoritarian crackdown – to control the pandemic and civil liberties – led to an exodus of expatriate professionals from the financial sector. Can India position Mumbai or GIFT City in Gujarat as credible options for businesses and professionals looking for alternatives to Hong Kong?
In the first half of January this year, Indian companies raised over $6 billion in external debt. Interest rates are low, there’s a good chance the rupiah will strengthen against the dollar, and global funds are eager to deploy some of their corpus in a strong emerging market like India. The only surprise is that so few Indian companies are taking advantage of this opportunity. However, no company collected the money from the International Financial Services Center in GIFT City, Gujarat. They went abroad. Can India become a center of global financial transactions, at least for Indian companies? Yes indeed, if only India would first develop a vibrant market for debt, both government and corporate, in India.
Is the problem that the rupee lacks full convertibility? In fact, the rupee is fully convertible for foreign investors, only for residents there are restrictions on automatic convertibility. Thus, if a foreign investor wanted to participate in an issue of masala bonds in India (rupee bonds issued to foreign investors who bear the currency risk), he could contribute as much capital as necessary and withdraw it later without any restrictions. . What about the associated currency, credit and interest rate risks? Can they be fully covered in India? Alas no. But Singapore will offer non-deliverable futures contracts for longer maturities than those available on derivatives offered in India. If some transactions have to be done overseas, why split the issuance process, do some in India and the rest overseas? It would be easier to do everything abroad.
The professionals who carried out the transactions for the Indian companies which took on debt abroad, both on the selling side and on the buying side, would have been persons of Indian origin, for a significant part. Capital providers could be located in India as well as New York, London, Singapore or Hong Kong. What needs to be done to bring significant debt raising activity back to earth?
India has done some groundwork needed to make a debt market work in India. We have a variety of derivative instruments in place to hedge against the risks inherent in issuing debt securities. However, the tax on stock market transactions remains an obstacle. The regulation now allows the netting of debts/receivables. What is still missing is an active secondary debt market. The RBI must let go of its desire to control public debt trading and change and alter short and long-term rates through active intervention.
Government bonds are securities and must be traded under the exclusive supervision of the market regulator Sebi. The government promised in the 2019 budget to set up a Credit Guarantee Enhancement Corporation. It remains a good idea, a metaphysical virtue, not an operating entity that provides a useful incentive to revive an active bond market.
Indian bond issues tend to be held, ie held to maturity, rather than traded. Only an active trade would help in discovering the true cost of capital in the Indian market.
Another vital step that needs to be taken could be to abandon the insistence that only the highest-rated papers are eligible for investment. Indian companies that raise funds through bonds with a good rating are also the ones that can raise funds anywhere in the world and banks are keen to lend, without the costs and hassle of issuing debt. Only by letting subprime borrowers issue debt will India’s corporate debt market take off. Let medium-sized enterprises and non-banking financial corporations that lend to the micro, small, and medium-sized enterprise (MSME) segment issue subprime bonds offering interest rates that incorporate sufficiently high risk premiums. Large savings pools can afford and would like to invest in such high yield bonds, even with their high risk profile, by allocating a small proportion of their total corpus.
Developing the subprime bond market is the way to create a vibrant debt market where Indian companies can raise foreign capital by issuing foreign currency or rupee debt right here in India.
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