MUMBAI, May 9: Development financial institution Industrial Development Bank of India (IDBI) has set up a new benchmark rate for five-year paper by entering the debt market with a Rs 1,000-crore issue at a coupon of 13.5 per cent. This is the lowest coupon rate offered by a triple `A'-rated debt instrument. The issue is being placed privately.

This is the first debt offering by IDBI after it cut its prime lending rate to 15 per cent and announced its plan to enter short-term working capital financing.

IDBI is floating two types of paper, a floating rate note and a fixed rate note, each with a five-year maturity. The coupon of the floating rate note (FRN), linked to 10-year government paper, is pegged at 50 basis points above the paper's yield with the floor fixed at 13.25 per cent. Since the coupon rate of the 10-year government paper in the primary market is ruling at 13.05 per cent, the note offers a 13.55 per cent coupon.

Aimed at wholesale investors like banks, the face value of the paper is Rs 1 lakh and in multiples of Rs 1 lakh. Leading merchant bankers like Kotak Mahindra Capital and SBI Capital Markets are lead-managing the issue.

This is the second floating rate instrument launched by the institution. The previous attempt did not receive an encouraging response, sources said.

The five-year fixed rate note carries a coupon of 13.5 per cent. The yield on the paper, which has a call and put option after three years, works out to 13.96 per cent. The redemption premium after five years for the paper has been fixed at 1.5 per cent.

According to merchant bankers, the floating rate note linked to the 10-year paper's coupon will be a success with wholesale investors, especially banks. "It is tailormade for banks as they have floating rate liabilities with them," a leading merchant banker said. To match the floating rate liabilities, like bank deposits which now carry interest rates linked to the bank rate, banks are likely to invest in floating rate instruments as these assets will help them hedge their liabilities, sources said.

However, a section of merchant bankers feels the slashing of coupon rate may not go down well with wholesale investors who are unhappy with the new benchmark rate at 13.5 per cent. The private sector corporates already have a benchmark of 14.5 per cent, the rate at which Reliance entered the debt market.

The Reliance Industries Rs 100-crore issue has picked up around Rs 200 crore from the wholesale investors, a source said.

Steel Authority of India Ltd closed its Rs 500-crore seven-year paper within hours of opening in the first week of May.

The paper carried an semi-annual coupon of 14.5 per cent with an annualised yield 15.3 per cent.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.