Page 3 of 7The government does not look too keen in pumping in fresh capital right now andas the economy is expanding banks will need more capital. Accordingly, alternativeforms of capital raising would be required in the form of hybrid capital. Perpetual bondswere used during the 1980s for recapitalisation of public sector banks and werediscontinued since 1994. Some of the banks that returned capital to the Governmenthave already shed these perpetual bonds.Raising capital through other avenues such as equity hurts the return on equity.With the introduction of Basel II norms, Indian banks will need additional capital of up toRs 60,000 crore to maintain their capital adequacy ratios in the next five years,according to the Finance Minister.
Who will invest in them?
They are an attractive option to long-term investors such as provident funds andinsurance companies. In a bid to improve return on investments, provident funds (PF)and insurance companies have begun parking funds in perpetual bonds floated bybanks.
Have any Indian banks raised perpetual bonds?
Two banks have recently issued perpetual bonds in Indian Rupees — IndianOverseas Bank and UCO Bank. IOB in March 2006 raised Rs 200 crore through anissue of `perpetual bonds,' the first bank to use this means of funding. These bondscarry an interest rate of 9.3 per cent, payable every half year. Darashaw & Co, aMumbai-based securities firm, had invested Rs 200 crore in Indian Overseas Bank(IOB), picking up the entire offering of perpetual bonds issued.UCO Bank raised capital to the tune of Rs. 230 crore by issuing InnovativePerpetual Debt Instruments ranking for tier -I capital and another amount of Rs. 500crore by issuance of bonds ranking for upper tier -II Capital during the quarter ended30.6.2006. In both cases, the bulk of the subscribers were insurers and provident funds.
Which is the first Indian bank to raise perpetual bonds (qualifying as Tier II capital)overseas?
UTI Bank becomes the first Indian Bank to successfully issue Foreign CurrencyHybrid Capital in the International Market. These instruments are qualified as upper tierII capital.
UTI Bank Ltd had announced that the Bank raised USD150 million of 15-yearsubordinated Upper Tier II bonds in the international market on August 04, 2006. Thesebonds are priced with a fixed rate coupon of 7.25%, equivalent to a spread of 231.5basis points over the 10-year US Treasury, or a yield of 7.273%. This is equal to aroundLibor plus 170 basis points.
Which is the first Indian bank to raise perpetual bonds (qualifying as Tier I capital)overseas?
ICICI Bank Ltd had announced that on August 17, 2006, the Bank successfullypriced the first-ever
foreign currency perpetual non-cumulative subordinated debtsecurities
offering qualifying as
Tier I capital
by an Indian bank.