Mumbai, July 9: Call it old wine in a new bottle or whatever you may. The Resurgent India Bond (RIB) issue is no different from the India Development Bond (IDB) of 1991 but for the circumstances that prompted the government to launch the two issues. The maturity, repayment and pre-payment structures of both the instruments are identical. Besides, both the bonds offer similar tax benefits.The only difference is that while IDB holders enjoyed immunity from disclosures under Income Tax, Gift Tax, the Foreign Exchange Regulation Act (Fera) and the Foreign Contribution (Regulation) Act, subscribers to RIB will not have such luck.
Absence of an immunity offer in RIB is more to do with the circumstances behind the issue. The sense of urgency that was there at the time of the IDB issue in late 1991 when the country suffered from the worst-ever balance of payment crisis does not exist now despite the shadow of economic sanctions looming large over the country.
On the interest rate front, the IDB offer wasbetter than the present one. IDB offered a coupon of 9 per cent on dollar subscription for the five-year bond, while the RIB offers 7.75 per cent on the same. It has partly to do with the benchmark rates set for the foreign currency non-resident (FCNR) deposits for NRIs. In early 1990s, the interest rate on longer maturity FCNR deposit was pegged at 8.5 per cent. At present, banks offer 6-6.5 per cent on three-year dollar deposits in the FCNR scheme.
However, RIB offers better interest rates over the prevailing FCNR deposits -- the chief foreign exchange deposit option for NRIs with Indian banks. The difference between the IDB coupon rate of 9 per cent and the then FCNR rate was only 50 basis points while the difference between RIB coupon rates and the present FCNR deposit rate is 175 basis points, thus giving a clear advantage for RIB to be as much a success as IDB.
India Development Bond had managed to gather more than $2.5 billion. The target of Resurgent India Bonds is $2 billion. IDB was issuedduring the fixed exchange rate regime and the dollar was pegged at around Rs 20 at that time. The Reserve Bank of India had to shell out over Rs 2,000 crore during redemption in early 1997, following substantial erosion in the value of the rupee. In the case of RIB, the centre will bear the exchange rate risk through the Reserve Bank. However this time, the State Bank will have to pay a nominal guarantee fee for the risk cover.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
