Not so fast

To view the digital version of this report, please <a href="http://edition.pagesuite-professional.co.uk/Launch.aspx?EID=b624b401-c314-40f7-8d98-36f5a0067ab7" onclick="window.open(this.href);return false;" onkeypress="window.open(this.href);return false;">click here</a>. India has all the right ingredients. Yet, instead of producing a delightful dish to tempt even the most sceptical of emerging markets investors, its recipe is in danger of leaving a rather bad taste. A stable government and tight controls on capital flows protected India from the worst of the global crisis in 2008-09, but the country has failed to capitalise on its position of strength so far. Worse still, India’s efforts to boost its reputation as a business destination are under threat. Corruption scandals are undermining confidence among foreign investors, while domestic entrepreneurs complain that overregulation is harming their prospects. Inflation, too, has yet to be brought fully under control. Even after years of fund inflows, inadequate infrastructure remains a problem. Countless infrastructure projects are under way, but only the country’s domestic lenders are able to carry the financing burden, leaving the banking system under heavy pressure. Although there has been plenty of progress, India’s capital markets still need wholesale reforms. Debt restructurings are too slow to keep institutional investors interested, while liquidity in the bond markets is thin. The introduction of CDS products will help, but the predictably cautious approach of regulators means any dramatic improvement in trading volumes is unlikely. On the equity side, India’s public-sector issuers continue to set bad examples, waiting for mythically perfect conditions to offer stock and squeezing too hard on pricing when they should, instead, be using public offerings to establish solid market reputations and encourage secondary performances. Global conditions, however, are very much in India’s favour. As the US and Europe teeter on the brink of recession, global investors are looking to divert more funds towards emerging markets - both in an attempt to boost returns and to gain exposure to countries that are actually growing. There is no better time for India to gain a firm footing on the world stage. For that to happen, however, serious changes are still needed. First and foremost, the country needs to portray political stability, which seems difficult with the government clearly distracted by recent anti-corruption protests and unable to act in a way that does not have an impact on India’s image as an investment destination. Inflation is also a clear problem, but the Reserve Bank of India has acted decisively in taking the right steps to ensure the matter remains a manageable one, at least for now. Infrastructure development is a key impediment to the country’s economic growth, but this will require appropriate funding avenues. The rupee debt markets can be key funding sources and are getting much needed attention from regulators, but continue to suffer from lack of depth due to restrictions on the kinds of investors that can participate in this area. A large chunk of funds are with state pension and provident funds but they are unable to invest in a variety of rupee corporate debt. Foreign investors remain restricted, contributing to their disinterest in the local bond markets. Long-term funding options away from just the rupee loan markets need to be developed for India to provide its corporations with the necessary ammunition to fund their infrastructure projects. The securitisation market needs to be given a chance to grow beyond its current state of infancy, albeit with necessary safeguards. India clearly stands on the verge of being the recipient of huge investment flows - if only it gets its act together. Otherwise, the country will find itself missing out on a prime opportunity to assert its influence on the global economy. The Asia

To view the digital version of this report, please click here. It is July in Mumbai and the mercury is well into the 90s, as is the humidity. It is early in the monsoon season in India’s financial capital and everything is coated with a light sheen of moisture. Sanjiv, the manager of one of the city’s leading textile stores, mops his brow and shakes his head wearily. “We just finished one inspection [income tax, as it turns out] and already we have another [fire safety] starting tomorrow. It just never ends.” Sanjiv is not the type to curse, which is just as well. Already this year, he has been inspected nine times by various, generously moustachioed, bureaucrats. Eight more checks are set for 2011 alone, including electricity consumption, salary levels, union representation, and race-in-employment quotas (ensuring a firm hires staff from across India’s caste system). “I don’t mind the last one,” he says with a smile, “but all of this” – and here he spreads his arms wide – “is done to help business-hating civil servants line their pockets and hinder our progress.” It is a common lament in India, a nation of two faces. One, smiling and genial, is turned to the world. It beckons banks and IT giants in search of low-cost engineers and English-speaking support staff, as befitting a country central to the “Bric” grouping of emerging-market nations. “We think the ’India story’ is very much intact, with potential growth in excess of 8% per annum expected this year,” notes Paul Gruenwald, chief economist for Asia Pacific at ANZ. This face, says Nitin Rakesh, chief executive officer at wealth manager Motilal Oswal Asset Management, is the India of “Aspirers” and “Seekers”, a robust and fast-expanding middle class, with cash to spend on real estate, automobiles, and all manner of consumer staples.” It is the India benefiting from an almost unique historical demographic dividend, where around half of all the nation’s 1.2bn people have yet to reach 25 years of age. However, that face has a darker flip side. This is the India of Sanjiv and a million other business owners that view their own government with distrust and even hostility. An increasing number of Indians openly despise their political leaders. Forget, for a minute, that a staggering number of elected politicians (three in every 10 officials elected to the Lok Sabha, India’s lower house, in the 2009 elections) have faced criminal charges, including 84 cases of murder. This fact merely promotes the perception that local strongmen can trade money for power. An unusual plea The greater problem is that beneath the self-important governing elite squats a sclerotic bureaucracy with little interest in changing anything for the better. In recent years, Premier Manmohan Singh has made belated attempts to push through a reform agenda aimed at cutting red tape, slashing bureaucratic middle management, and turning the intra-government decision-making process clearer and more transparent. Nothing of the type has happened. Sir Mark Tully, a veteran journalist, who headed the BBC’s New Delhi office for more than two decades, believes there are “huge vested interests with having no reforms at all”. Indeed, he adds, “there is increasingly a general feeling here that India is closed for business”. This feeling has so pervaded India that Singh, a lame-duck leader bullied by his ministers and wielding authority on behalf of India’s real powerbroker, the Italian-born Indian National Congress party chief Sonia Gandhi, was forced to summon leading members of the business and media communities to his office this summer. Singh, desperate to drive the debate, enjoined chief executives and editors to buy into the story that India’s political leaders were committed to their stated reform agenda. The journalists and CEOs listened politely, then left, unconvinced. As one leading editor present at the meeting remembers: “Singh was trying to be tough, which doesn’t come naturally to him. He talked a lot about

To view the digital version of this report, please click here. While India’s ability to continue its rapid growth trajectory is giving investors and economists pause for thought, banks – both foreign and domestic – seem to be unswervingly sure of the potential of the country’s investment banking market. Elsewhere in the world, banks may be scaling back their operations and cutting staff counts, but, in India, they are boosting resources. Credit Suisse is expanding its equities, fixed-income and investment banking teams. At end-August, it announced 11 fresh appointments to these groups. The Swiss bank received its Mumbai bank branch licence from the Reserve Bank of India in August 2010. Barclays Capital India is hiring for its newly set up equities business, with more appointments expected in the next couple of months. The UK lender recently merged its commercial and investment banking teams in India, and retrenched 20–25 staff. Locally, consolidation is also taking place among domestic players. In November 2010, Axis Bank announced its merger with Enam Securities, complementing each other’s strengths. Religare Capital Markets has continued to add to its bench of experienced investment bankers. These moves, however, come at a time when the pipeline of advisory and underwriting mandates in India is looking shaky on a threat from global growth fears, as well as depressed domestic market conditions. It is also far from clear if advisers will be able to translate these opportunities into revenues, since years of cutthroat competition for trophy cross-border acquisitions have savaged underwriting fees with arrangers falling over each other to build relationships with the narrow field of business leaders in Asia’s third-biggest economy. Ask any seasoned banker in India about the low or zero-fee phenomena in the country and you will not be surprised to hear the answer. “Fee is a foreign concept in India. The only way one investment bank differentiates itself from another is its services and distribution reach and yes, the capability to throw its balance sheet behind the deal,” said the head of a foreign bank in India. Investment banking has been a fighting turf for fees and market share and over years the competition has grown more intense and complicated with the rise of the domestic firms. The spike in competition has been equal on both the equities and bond sides. The surge of local firms JM Financial, Enam, Kotak Mahindra Capital and, more recently, Religare on the equities side only shows that local brokers are becoming increasingly powerful. Local competition With the country expected to post GDP growth of over 7% in the next few years, the Indian growth story will continue to offer enormous opportunities and attract more market makers. “Domestic players will continue to dominate the local market because they have bigger appetites than international players,” said the head of a foreign bank in India. Many agree that local players, such as Axis Bank, ICICI Bank, Yes Bank or State Bank of India, are insurmountable on the domestic front. For their part, foreign banks do acknowledge this fact as the gap is simply vast between local and overseas players, in terms of distribution capabilities or holding capacity of the balance sheet. So, how does one define the competition in the Indian capital markets – healthy or chaotic? The answer is anybody’s guess. Maybe, it is both. “The origination business is not a revenue opportunity in India. Where the banks make money is trading and, there again, how much money is made depends upon the view the bank holds on interest rates and the credit,” said a senior banker with a US-based bank. Most agree the business is good if you are smart and canny. “I don’t see the fee characteristics of the Indian market changing quickly. It is very easy to lower fees, but very difficult to reinstate them,” said another banker with a European bank. Source: Reuters/Amit Dave An artisan paints a statue of Ganesha o

To view the digital version of this report, please click here. Primary equity issuance volumes in India have sunken to new lows amid depressed equity markets and a fall in confidence following the dismal secondary performances of recent issues. All hopes are now pinned on forthcoming government divestments, the success of which could reverse sentiment and unlock a bulging pipeline. Indian ECM issuance volumes have plunged so far in 2011 amid volatile secondary markets and a crisis of confidence due to domestic politics and a spate of corruption scandals. IPOs, follow-on offerings and qualified institutional placements, which were a feature of the market in 2010, had been few and far between year to date as key indices lost ground and political turmoil seemed to distract the government. The benchmark BSE Sensex has lost 21% so far in 2011. Thomson Reuters data shows that there were 57 equity and equity-related deals worth US$7.9bn in January-August this year, or almost half the US$14.5bn raised through 92 deals in the same period last year. “It is difficult to push through deals at the moment even though we have many companies sitting in the pipeline waiting to do deals,” said a banker. “Some small IPOs are still getting done, but no one really has the confidence to launch a decent-sized listing in these markets.” “The problem is that a number of decent-sized IPOs got done this year and most of these, at the time of bookbuilding, were seen as appropriately valued, but, post-listing, their trading performances have been miserable, pushing investment interest into a corner,” said another banker. For example, the Rs46.6bn follow-on offering from Power Finance Corp was 4.34 times subscribed when books closed on May 12. Retail books were two times covered and the QIB portion was 6.92 times covered. However, the stock then performed poorly. The shares were placed at Rs203, but were trading around Rs136–Rs148 last week. L&T Finance surprised the market with its Rs11.45bn IPO in July, but, despite a higher-than-expected 50bp interest rate hike in the middle of bookbuilding, managed to generate a healthy oversubscription. The stock priced at Rs52, but fell on debut and closed at Rs47.55 on August 25. The only chance of a revival is expected from the Indian Government’s ambitious divestment programme, which has failed to take off, despite some early success. State-run Steel Authority of India, which postponed its follow-on offering of up to Rs70bn (US$1.56bn) in June, is said to be looking at re-launching soon. Oil & Natural Gas Corp is also in line to launch its follow-on of up to Rs130bn, through which the government will sell a 5% stake. Also expected is a Rs190bn follow-on offering from Indian Oil Corp in the second half of the fiscal year. “The success of these privatisations is important, not just during bookbuilding, but also the post-share placement. So, the deals have to be priced at a significant discount to current trading prices if sentiment in Indian equities is to come back to where it was,” said a fund manager. There are other smaller divestments in the pipeline. The government has also approved the divestment of shares worth around Rs40bn in Hindustan Copper, with Bank of America Merrill Lynch, Enam, ICICI Securities, Kotak, SBI Capital and UBS as leads, while offerings for Rashtriya Ispat Nigam, which manufactures steel products, and National Thermal Power Corp are being discussed. Including this year’s target, the Indian Government aims to raise Rs950bn from the sale of shares in state-run companies over the next three years. Last year, it failed to meet its target of Rs400bn, falling short with just Rs224bn after several planned deals were delayed due to the weak market. Apart from domestic listings, stable market conditions may well prompt the launch of a few offshore listings, which figure prominently in the pipeline. India’s Fortis Group has plans for two listings worth a combined US$1.5bn. Citigroup, Nomura

To view the digital version of this report, please click here. Indian borrowers have long had a reputation for being a price-sensitive lot. This was borne out in Indian Oil Corp’s US$500m 10-year bond in late July. BNP Paribas, Citigroup and RBS were the three banks that handled the deal and one of them bid just US$1 in fees for the privilege of doing so. There is little doubt that it was simply a league table, trophy trade. In fact, this was not the first time IOC’s offshore bond was completed on such low fees. Back in January 2010, IOC’s debut offering was the harbinger of fee compression on Indian G3 bonds when the borrower mandated Deutsche Bank, HSBC and Standard Chartered for the deal at an extraordinarily low fee of just 3bp – or just 0.01% per bank. Thankfully for DCM bankers, IOC’s most recent transaction printed in late July when market conditions had already started deteriorating, making new issuance challenging. Since IOC’s bond hit the market, there has been only one G3 currency offering from India and that too from a borrower – Ballarpur Industries (Bilt), which was in no position to demand that its banks work for low fees, let alone for free. Given the patchy nature of deal flow from India in the past, it begs the question whether or not banks are shooting themselves in the foot in choosing to do deals for practically zero fees. Of the issuance of around US$63bn year to date from Asia (ex-Japan, ex-Australasia), India has accounted for US$8.22bn in terms of volume. In comparison, Chinese credits have raised double the amount with nearly US$17bn transacted in the same period. What is more, PRC high-yield borrowers accounted for US$9.73bn – more than all Indian borrowers (high grade and high yield) combined – with the country’s property sector raising US$4.53bn. Furthermore, Chinese borrowers happily pay up fees to get their deals away. “Imagine what would have happened if Chinese borrowers had taken the same approach as their Indian counterparts. The G3 bond business wouldn’t have been as rewarding as it has been so far this year,” said one Hong Kong-based DCM banker. “The state-owned borrowers from India are particularly notorious for paying little or no fees as they go for the lowest bidder,” said another Singapore-based head of DCM syndicate. “However, they are also, for the time being, the biggest providers of opportunities.” Indeed, of the 16 transactions from India this year, only three have had anything to do with private-sector borrowers. All three were high-yield credits, which means DCM bankers had a decent payday on their transactions. However, only one of the three – Vedanta Resources – raised, what would be considered, a chunky fundraising. Vedanta completed a US$1.65bn two-part issuance in late May. With the exception of ICICI Bank, which printed a US$1bn bond a week before Vedanta, no other Indian borrower has raised more than US$500m. That is not to say that India, as a market, is not attractive for the DCM business. A slew of borrowers have queued up to issue offshore bonds and these include some first-time issuers, such as telecom bellwether Bharti Airtel and Essar Group outsourcing unit Aegis. The two companies completed roadshows in June, but they have been cooling their heels since because market conditions have not been conducive enough to finish the job at hand. If their deals materialise, they will add more variety to the profile of Indian borrowers and pave the way for other like-rated credits to make offshore forays. In past years, banks and financial institutions have dominated issuance from India. The more corporates venture overseas with their bond offerings, the greater the opportunity. One of the more remarkable achievements in G3 currency issuance this year has been the emergence of long-dated bonds. Bilt became the first Indian company to print a foreign currency perpetual bond in August, but not after Tata Power had set the stage with a US$450m 60-year hybrid in mid-April – also

To view the digital version of this report, please click here. The Indian debt markets have demonstrated consistent growth in the last few years, with the government introducing various measures to increase the depth of the market. Industry participants believe the corporate bond segment has reached a turning point and is poised – with a push in the right direction – for rapid expansion. This optimism stems from various measures in the last couple of years to stimulate the domestic fixed-income market and reduce the burden on the country’s overstretched banks. Although there has been progress, the Indian bond market remains way behind its regional counterparts, indicating that a consistent push is required to take it to the next level. In 2011 (until mid-August), India’s rupee bond market had registered 318 deals totalling Rs1.14trn (US$25.3bn), according to Thomson Reuters data, roughly on track to match the 2010 full-year figure of Rs2.15trn from 637 deals, up from Rs1.71trn in 2009. Of this, however, corporate bonds accounted for Rs679.5m so far in 2011, well below the Rs24bn for 2010 and Rs4.9bn for 2009. India’s corporate bond market still lags well behind those of its biggest neighbours – China (US$49.7bn), and South Korea (US$31.1bn). Even Malaysia (US$4.2bn) and Singapore (US$3.2bn) have recorded more corporate fundraisings in 2011 than India. With the public sector accounting for a vast majority of rupee bond issuance, the onus is on the government to accelerate reforms to address that problem. “Fixed-income is an enormous opportunity in a growing economy. Unfortunately, the government still dominates this space in India. Clearly, these are great opportunities for all arrangers, but how these are realised remains to be seen,” said Jaideep Khanna of Barclays Capital. Industry players believe the bigger-than-expected rate hike in late July has prompted many corporate treasurers to look at the rupee bond market as a more viable funding option. The Reserve Bank of India added 50bp to the repo rate on July 26, its 11th hike since the tightening cycle began in March 2010. Extra documentation The hike in the key rate has pushed banks’ base rates higher, thus reversing the pricing gap between the loan and bond markets. Some participants estimate that loans are now about 125bp costlier for most corporate borrowers than bonds. “Base rates have gone up over 1% since the start of this fiscal year, encouraging a lot of companies to look at the bond markets a lot more closely as a funding option,” said Hitendra Dave, head of global markets at HSBC India. Dave added that new issuers would be more than willing to go through the extra documentation in order to benefit from the better pricing in the bond markets. The base-rate regime, introduced in July 2010, prevents banks from lending beneath their respective levels, many of which now hover above 10%. The rule was designed to stop the popular practice of banks lending below their prime rates, which the central bank feared could add to credit concerns further down the line. “Post the latest rate hike, there is also more discreet buying from asset managers, who were earlier of the opinion that interest rates would keep going up. However, market opinion is now split with some believing the policy rates have peaked,” Dave said. India’s domestic bond market is closely aligned with the growth in infrastructure financing. The country has spent billions on infrastructure in the last five years or so and estimates are that it will fork out a further US$1trn equivalent over the next five years ending 2017. Confined to the domestic banking sector, the rush of lending has inevitably put pressure on India’s banks, and the rupee bond market is being seen as the best way to strengthen the country’s capacity to finance its projects. Many banks are finding it harder to lend to infrastructure projects, having either hit their sector exposure limits or reached concentration levels on lending to particu

To view the digital version of this report, please click here. Many Indian acquirers seeking US dollar borrowings – mostly for overseas assets – have hit the market in the last 18 months and there are no signs that such activity is slowing. A significant driver of growth in offshore loans will continue to be resources- and commodities-related acquisitions, likely in either Australia or Indonesia, said B Krishna Iyer, head of ICICI Bank’s international syndications group, at the Asia Pacific Loan Market Association annual conference in June. Indian companies had “huge resource requirements” and were currently looking at potential acquisitions in Asia, Europe and Africa, said another India-focussed loans banker. In particular, “many power producers are looking to acquire coal mines. The significant shortage of coal in India is not going to change anytime soon”, said a third banker. Of late, there have also been healthy offshore acquisition activities in other sectors. Loans backing Aditya Birla Group’s US$875m acquisition of US-based Columbian Chemicals closed heavily subscribed in the first half of this year. With ANZ, Bank of America Merrill Lynch, HSBC, RBS and Standard Chartered as leads, the cross-border deal involved loans totalling US$350m to Indo-Egyptian and Thai joint venture companies, and financing, which relied on the credit of the US target. Despite the turmoil in Egypt at the time, both the Thai and Egyptian loans were well-received in syndication by both onshore and offshore banks – partly because of the strength of the sponsor, said an India-focussed loans banker at an international bank. Business process and technology management company Genpact signed a US$380m loan to back its acquisition of IT services provider Headstrong Corp in June. Nine banks joined original leads BAML, Citigroup, JP Morgan and UBS in senior syndication. Although general syndication was originally on the cards, it was not, in the end, needed. “High-quality sponsors making synergistic acquisitions offshore have received solid support from the banking industry, both onshore and offshore,” said a Mumbai-based loans banker. Unique challenges Other recent India M&A financings illustrate how events beyond bankers’ control can drastically affect deal timelines. In March, ICICI Bank prefunded and launched into syndication a loan of US$800m to back Lanco Infratech’s acquisition of Australia’s Griffin Coal. Bank of India joined as sub-underwriter with US$200m. Come May, in general syndication, three more Indian banks had committed a total of US$140m. In June, Australia-based Perdaman Industries filed a lawsuit against Lanco in relation to a coal-supply agreement with Griffin Coal. Lanco has called Perdaman’s claim “baseless”, although a decision on the lawsuit is still pending. The deal is still currently in syndication. In August last year, Cairn Energy agreed to sell a majority stake in Cairn India to mining giant Vedanta Resources in, what will be, one of the largest deals in India’s energy sector. However, completion, which requires Indian Government approval, has been delayed due to a disagreement over royalty payments involving Oil & Natural Gas Corp, Cairn India’s partner in the Rajasthan oilfields. Senior syndication of a US$3.5bn portion of the original US$6bn financing was launched last December with eight international banks as leads. The syndicated amount was later reduced to US$2.97bn, after the purchase price for a 40% stake was reduced to US$6.023bn from US$6.651bn in June. It was originally hoped that syndication would close in one or two months, said a source familiar with the matter. However, government approval, considered to be a “key milestone” in the syndication process was a long time coming, allowing senior syndication to close only recently. Vedanta announced that it had received formal notification of conditional approval of the acquisition on August 1 – around a year after the proposed acquisition was unveiled. T

To view the digital version of this report, please click here. Over Rs315bn (US$6.8bn) of foreign currency convertible bonds are set to mature by March 2013, piling pressure on India’s corporate issuers. Equity-linked bankers, however, are not expecting huge defaults, but are instead readying themselves for restructurings, refinancings and even some decently sized primary deals. Behind that sense of optimism is the enduring appetite investors have shown in Indian structured deals, despite global market volatility. Although some small- and mid-cap companies may struggle to meet redemptions, most of the CBs that large-cap issuers sold are expected to be either refinanced or paid down. “The Indian growth story is still intact, despite global market turmoil, and there is a perception that, once certain economic indicators like inflation come under control, emerging markets will outperform,” Aloke Gupte, head of equity-linked at JP Morgan. “Already, there are discussions between banks and corporations about primary deals and even about how best some of them can be restructured,” he added. Indian CBs have been a rare commodity of late, especially relative to the 2004–07 period when high-premium, zero coupon paper from the country flooded the equity-linked market. Many companies and investors, who had bet that these stocks would rise to stratospheric levels during those years, were, however, proven completely wrong after the market turned in early 2008. The wave of CBs left many issuers stuck with debt obligations that were, in many cases, double their market caps, and they defaulted on their obligations. The stories of repayment troubles were many in the last couple of years, but the most prominent among them were the woes of pharmaceutical group Wockhardt and new energy manufacturer Suzlon Energy. The two were the prime examples of the challenges of restructuring structured equity debt in the complicated Indian market. Suzlon, for instance, sold two CBs for a total principal of US$500m in 2007, but ran into trouble meeting covenants on its debt and struggled to refinance bonds that ended well out of the money. Wockhardt is still fighting a long-running battle with holders of US$74m of its US$110m zero coupon CBs after defaulting in 2009. Markets still open As a result of troubles at these – and other – companies, foreign investors turned risk averse and showed interest only in low premium, high-yield structures, ensuring that India’s CB market had been all but non-existent in the last year or so. However, times are changing and bankers are expecting more equity-linked business from India in the form of primary deals or refinancings that are coming up for redemption. “Companies that have held back until the last minute really don’t have much of a choice but to accede to investors’ demands. So, there could be some deals that are basically low-premium, high-coupon structures. Also, there is still an issuance window for high-quality Indian credits – if they lower their pricing expectations,” said one banker. Source: Reuters/Amit Dave People apply coloured powder to a woman’s face as they celebrate Holi in Ahmedabad. Suzlon proved that point in April this year, when it raised US$175m through a five-year CB that showed investors still had confidence in the company, despite its struggles with debt management. The Suzlon deal, the first CB from India in 2011, funded the company’s purchase of the remaining 4.84% stake in REpower Systems and came less than a year after the former completed the drawn-out restructuring of CBs issued in 2007. Suzlon’s success suggested investors remained interested in Indian CBs – at the right price. Suzlon’s CB was structured in a way that left it looking very likely to be converted into equity. It paid a 5% coupon and a 6.5% yield, with the conversion premium fixed at just 10% over a reference price of Rs49.10 – the average of the stock price on April 4 and April 1. The equity-like, low-premium, high-coupon s

To view the digital version of this report, please click here. Every developing country has an epiphany in its history when it gets accepted as a member of the global elite. China’s moment came when it joined the World Trade Organization in 2001, while Brazil’s came when it was chosen to host both the summer Olympics and the football World Cup between now and 2016. India’s moment of clarity was the result of three activities in which the South Asian nation excels – entrepreneurship, bureaucracy, and cricket. When the three combined in September 2007 to create the Indian Premier League, the cricketing world stood up and took notice. From any angle, the IPL is a staggering success. In style and tempo, as well as its love of glitz, glamour and hard cash, the tournament emulates another triumph of sport branding, the English Premier League. Like Europe’s leading soccer league, the IPL has gorged itself on television revenues. A retroactively revised, 10-year television rights deal, running until the 2017 season, is worth US$1.6bn, 20% of which goes straight into the coffers of the tournament’s regulatory overlord, the Board of Control for Cricket in India. That guarantees the 10 IPL franchises US$130m each in hard cash over the course of a decade. Sponsorship money also floods in. Construction giant DLF Group shelled out US$50m to promote the tournament between 2008 and 2012, while second-string sponsors PepsiCo (US$12.5m) and beer-to-airlines group Kingfisher (US$26.5m) also paid to daub their logos around a host of gleaming stadiums. To be sure, the money flows in both directions. Player salaries are, for a traditionally low-paying activity like cricket, astronomical. In the latest IPL auction in 2011, one of the franchises bought a player for US$2.4m. This makes playing in the IPL pro-rata the most lucrative-paying sport in the history of the world. The question that pops to mind is: what next? In sporting terms, the IPL is already a global success story, viewed wherever one finds a sizable group of expatriate Indians, from Britain and Australia to the US and the Middle East. Yet, in financial terms, the jury is still out. Most IPL franchises are widely believed to be suffering losses. In some cases, this does not matter. Mukesh Ambani, who, according to Forbes, is the world’s sixth-richest man, can easily bankroll his team, the Mumbai Indians. So can billionaire Vijay Mallya, owner of the Kingfisher Group and the Royal Challengers team from Bangalore. Financial fault-lines are more visible elsewhere. A mysterious group of Indian businessmen paid US$330m to buy the Kochi Tuskers, one of the two new teams auctioned in 2010. Yet, within 12 months, the owners, complaining of a lack of local support, were agitating to transfer the team north and west to Ahmedabad. However, perhaps this was the point. In the US, sporting franchises are freely traded between cities. That free-wheeling ownership model may, in time, infect India, with teams traded as easily as cricket players. It will, at the very least, be a clear way for the business community to profit from their franchises. For now, most owners profit from selling minority stakes in their franchises to equally cricket-crazy millionaires. In 2009, Bollywood actress Shilpa Shetty and her businessman husband Raj Kundra bought 12% of the Rajasthan Royals franchise for US$15.4m, effectively valuing the franchise at US$130m, almost double what its original owner, Mumbai media mogul Manoj Badale, paid the year before. Many India-based investment bankers have been tasked with finding potential investors for IPL franchises. Another exit route for original owners may be a simple initial public offering from a franchise. Indeed, this may come to be not just welcome, but financially necessary. The IPL may be, as the Bangalore-based cricket analyst Dileep Premachandran notes, “part-vanity project, part-business proposition” – again mirroring England’s EPL. However, it also needs a secure fiscal

To view the digital version of this report, please click here. In the global context, India’s securitisation market has hardly taken off, despite many years of chest thumping by banks and rating agencies because regulators have been wary of opening up the market – especially after the 2008 sub-prime crisis. Many market players have said the government should work to deepen the securitisation market because it will provide stable long-term capital to companies and institutions looking to develop the country’s infrastructure sector. The regulators have instead worked to deepen the rupee bond market and have introduced more restrictions on securitisation. However, amid the turmoil related to the US and European sovereign debt crises and a diminishing of investment options, Indian bankers are now urging investors to look at the country’s securitisation products more closely. “Despite product limitations, Indian securitisation transactions have thrived and transaction performances for allowed categories have been generally stable through credit cycles, with few transactions defaulting or threatening to default,” said Peeyush Pallav, vice president structured debt solutions, treasury and markets at DBS Bank. Although delinquency rates differ according to the asset class being securitised, they were only about 1%–6% of the overall market for asset-backed securities with cars or commercial vehicles as the underlying, and about 1%-3% for mortgage-backed securities, said bankers. Safe investments Pallav noted that, structurally, Indian securitisation deals were safe investments. Most cash-flow securitisations have as their underlying fixed-rate consumer loans or floating-rate mortgages with equated monthly instalments from underlying borrowers. “Since revolving structures are prohibited in India under the extant regulations, almost all transactions there have been amortising in nature. Even though this increases reinvestment risks on account of prepayments, it reduces the refinancing risks,” he said. Most transactions in India are also originated for assets backed with cash flows with no synthetic securitisations or re-securitisations permitted. Security cheques or post-dated cheques usually protect loans in India, adding further security under the Negotiable Instruments Act. In addition, the loans are not obligations limited to the extent of the security available, and borrowers are required to pay the shortfalls even after the repossessions and subsequent recoveries have been enforced. “Securitisation transactions help issuers to access capital in a form different from plain debt, equity or hybrid and, thus, allow them to have a well-diversified capital structure,” said Pallav. “From an investing bank’s viewpoint, the strong legal and financial structuring behind these deals, the possibility of replacing the servicer in a stress scenario, as well as the counterparty exposure on a diversified basis, improve the credit quality of the exposures the institution may otherwise carry on its books,” Pallav added. Greater transparency They also offer greater transparency to portfolio investors. The monthly reporting of portfolio collections, delinquency build-ups, defaults and recoveries highlighted transaction performances across asset categories, geographies, borrower types, and issuer types, in advance of their impacting issuers’ financial statements. There is indeed room for securitisation to grow and for the right reasons on account of providing investor diversification, capital structure diversification and its asset liability matching nature. Difficulties, however, remain. Issuers, for instance, now find costly the inability to reduce credit enhancement in line with transaction amortisation. They also find uncertainties – with respect to tax transparency, security creation, and raising of foreign currency debt – detrimental to the development of a future flow market. Asset categories, such as short-term receivables, are unlikely to be f