Casting a wider net

Source: Reuters/Vivek Prakash Youths tug at a rope line used to fasten a cargo ship, which ran aground, to the shore in Mumbai This year’s IFR India Special Report comes at a challenging time for Asia’s second-largest economy. Many of the issues that were already brewing 12 months ago have snowballed into serious problems, and confidence is wearing thin. To see the digital version of this report, please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com India’s long-term potential remains enormous, as any capital markets participant would readily agree. The growing consumer population and huge infrastructure requirements are big opportunities for financiers and investors at home and abroad. However, this long-term potential will mean nothing if India is unable to address a host of pressing short-term problems. India’s growth rate is slipping, inflation remains high and its infrastructure is creaking. Reforms are sorely needed. Policy paralysis is the root cause of India’s current malaise – and not just at the highest level. Frustration is growing throughout the corporate sector and across the capital markets, where deals are bogged down due to excessive regulation, while essential reforms have stalled. This report looks at some of the fixes needed to get the country’s markets – and the broader economy – back on track. The foreign exchange market provides the clearest indication that India needs to restore confidence after a series of scandals and policy missteps. A 25% plunge against the US dollar may help India’s exporters, but it does nothing to ease the old problem of inflation. The rupee looks to have finally found some support, but a sudden rebound looks unlikely. The bond market, a perennial disappointment for India’s bankers, needs major surgery if it is ever to ease the burden on the country’s overstretched banking sector. Recent moves suggest that its shortcomings have finally been noticed at the top level, but it will take a serious regulatory overhaul to transform the rupee debt capital markets from their current position. India needs to allow more investors – domestic and foreign – to participate, and push companies to diversify away from bank loans. Lenders, for their part, need to break the habit of rolling over bad debts and stop supporting companies that have outlived their economic lives. However, that is a tall order without some kind of reliable bankruptcy framework to allow banks to recover losses in the event of defaults. As it stands, extending maturities is a lender’s best shot. India’s equity markets, too, are in need of a lift. The government’s ambitious plans to float more shares in its public companies is, ultimately, the right course of action, but talk of multi-billion rupee selldowns creates a heavy burden on already weak markets. India needs to manage its own expectations, instead of forcing these deals through at too-high prices or trying to time the top of the market. There is much to be done, but there is also reason for hope. India’s borrowers continue to enjoy a strong following in the overseas loan markets – albeit from very different sources than two years previously – and a recent flurry of US-dollar bond sales was an important vote of confidence in the country’s financial institutions. Swift action does not come naturally to India, which is known for its excessive red tape. If the events of the last 12 months, however, have finally convinced policymakers that these problems urgently need to be addressed, India may yet emerge stronger.

Source: Reuters/Parivartan Sharma A man stands on a stepladder to fix tangled overhead electric power cables at a residential area in Noida To see the digital version of this report, please click here. It is the first day of September. Diana, who started work as a shop assistant a month ago in one of the glitzy local malls in the Indian capital of Delhi, is waiting for customers to drop in. She is mystified about the thin crowds on a Saturday evening. “Last month, there were many holidays. Hence, perhaps, people want to stay at home this weekend,” she muses. Diana is not alone in wondering why customers are either not coming, or are there, but not buying. India’s consumption engine is now showing signs of fatigue. At the same mall, a large furniture showroom has put up a notice that it has moved to a cheaper part of the city under the guise of taking up more spacious accommodation. It is a sign of the times. Economic activity has slowed perceptibly, and belt-tightening is in evidence at both the corporate and individual levels. India’s economic growth has decelerated from over 8% only a year ago to just 5.5% in the second quarter of 2012, amid a near collapse of industrial growth and declining exports. Going on the 5.3% growth in the previous quarter, this is no short-term blip. “This is not a temporary slowdown,” says former central bank governor and parliamentarian Bimal Jalan. “The investment climate is quite pessimistic, even though not all is dark.” India’s robust economic growth in the past few years has been instrumental in lifting millions out of poverty. For this constituency, inflation exaggerates the impact of any slowdown and threatens to take away their gains. While the central government’s large social schemes aim to provide some relief, they come with the unintended consequence of adding to the fiscal deficit at a time when tax collections are also falling. For the middle class of nearly 160m, a slowdown pinches through slower job creation and a reduced capacity for discretionary spending. High interest rates are also dampening the credit-driven boom in real estate and purchases of household goods. Stubborn inflation and the government’s large spending both on subsidies and social schemes reduce the central bank’s headroom for action, with policymakers facing the difficult challenge of boosting growth without raising inflation.Policy paralysis A further deterioration of central finances may well lead to the loss of India’s investment-grade credit rating. Uncertainty and sluggish growth in the global economy are not helping. Yet, a cyclical slowdown alone does not explain the despondency that seems to be engulfing India. Rather, the extent of the current pessimism stems from the failings of a fractious political system that has not been able to deliver the structural reforms needed to sustain the country’s high growth. Two incidents in July highlight the impact of that lack of reform. The death of a human resources manager in a violent escalation of an industrial dispute at India’s largest automaker Maruti Suzuki has turned the spotlight on India’s antiquated labour laws, while two consecutive days of massive power outages caused essential services in major parts of the country to grind to a halt. The lack of political will and parliamentary consensus have stymied reforms in both these sectors. Instead of putting these – or other – urgent items at the top of the agenda, the government and opposition parties have been locking horns over fresh graft charges every few months. The political capital needed to push through reforms is missing. In the prevailing limbo, even simple measures that can boost sentiment have little chance. This policy drift has left the investment climate a nightmare for any institutional or corporate investor. There are numerous outstanding issues – telecom licenses need to be re-awarded after a corruption scandal, the allocation of coal blocks has recently come under the scanner with estimat

Source: Reuters/Mukesh Gupta A shopkeeper poses for a picture as he counts Indian currency notes at his shop in Jammu. To see the digital version of this report, please click here. Is the Indian gravy train, which was once running along smoothly, about to be derailed? The rupee’s recent fall has set alarm bells ringing. In the past year, it has plunged precipitously, more than 25% against the dollar, roiling currency markets in the country, driving up import prices and adding to the persistent problem of inflation. Most worrying for India, the recent fall has come about even without an obvious cause for concern, such as the Lehman Brothers crisis, which had threatened a severe credit crunch the world over. At that time, the rupee also dropped around 25%, but all major Asian currencies were affected. With that kind of trigger missing, the present situation is quite different. Is the falling currency a tell-tale sign that India’s economy is shrinking? Even when the dollar is not at its best, the Indian rupee has still been the worst-performing of Asia’s key currencies with the Korean Won, the Indonesian rupiah and the Malaysian ringgit having fallen about 7%–10% against the dollar. For rupee watchers, the situation has set alarm bells not just tinkling or ringing – but clanging. The rupee is in a precarious situation and forex experts have their fingers tightly crossed. “The rupee has its own weakness. Despite the international factors that have not been positive for the US dollar, the rupee has been unable to track the weakness in the US dollar. This signals that the market for the rupee is inherently weak,” says India Forex Advisors CEO Abhishek Goenka. Had this been any other time, it would seem like the Indian economy were jostling for a competitive spot in the global economy. Competitive devaluations to boost exports and curtail imports are, of course, nothing new for emerging-market economies, such as India. However, the swift and sharp decline of the rupee in recent times is not at all about increasing the Indian economy’s global competitiveness, but about how badly managed the country’s macroeconomic situation is turning out to be – and how, perhaps, it is slowly getting out of hand.Myriad of problems Once revered for its growing strength and clout in the world economy, India is now beset with a myriad of problems – a ballooning fiscal deficit, crumbling infrastructure (an increasing number of power failures and collapsing bridges), coupled with a government unable to usher in crucial reforms to ease fiscal pressures. “Depreciation has been swift and the Indian macroeconomic situation has not had enough time to adjust to the sudden fall in the rupee,” says Tata AIA Life Insurance CIO Saravana Kumar. “The drop has bloated the current-account deficit and increased the cost of sticky oil imports, hugely impacting the fiscal deficit. It also inflames inflationary pressures, clearly seen from the fact that India has not benefited meaningfully from the softness in global commodity prices.” One saving grace has been the surge in portfolio flows into India. Without those, analysts believe the rupee would have tottered even further. Since the beginning of the year, overseas institutional investors purchased equities worth nearly US$12bn, and debt close to US$9bn. This has alleviated pressure on forex markets, but has not had a positive impact on the rupee. That is because the widening current-account deficit has knocked India’s fore situation off balance. Says Goenka: “I don’t think the fairly good portfolio inflows suffice to manage the current-account deficit. People compare it with last year and previously, but the point is that, earlier, the current account was 3%. Now, it is at 4%. So, obviously, the money that is coming in is not in the same proportion.” The crumbling rupee has heightened problems for businesses in India. Chief among them is that the cost of hedging and doing business has gone up, as issuers of forward cont

Source: Reuters/Danish Ishmail Children climb trees as they play on the outskirts of Srinagar To see the digital version of this report, please click here. Nearly three decades after the first deals, rupee bonds remain little more than a sideshow in Indian corporate finance. Companies have had the run of the bank loan market, while investors have shown little appetite for credit risk. A series of stalled initiatives to reinvigorate the market are a constant source of frustration for India’s financiers. However, all that may be about to change. The government recently appointed Subhash Chander Kalia, a former banker with Union Bank of India and Vijaya Bank, as an adviser, tasked with getting the market back on track. In particular, Kalia’s appointment is designed to improve co-ordination between the many different regulators and market participants, and ensure that recommendations of various committees are implemented. Although he sits within the fully state-owned India Infrastructure Finance Co, Kalia reports directly to DK Mittal, secretary, department of financial services. The mandate sends a message that the government is determined to give India the vibrant corporate bond market needed to meet its huge infrastructure financing needs. India needs to invest Rs1trn in infrastructure in the next five years to maintain its economic growth. The country reported growth of 5.5% for the April-June quarter, the lowest in three years. To fuel the growth, it is crucial for India to have a flexible financing option at its disposal. A large part of this infrastructure financing will come from the debt markets. With the banks already full and facing their own capital adequacy pressures, the role of the bond market is poised to grow. Volumes are indeed growing, but, on a global scale, India’s local bond market is still tiny. It represents less than 4% of the country’s GDP – far less than the average proportion and dramatically lower than developed countries like the US, where the bond markets account for 130% of the country’s GDP. Rupee bond sales have surged this year to Rs1.8trn from 599 issues, as of September 6. During the same period last year, the industry raised Rs1.3trn from 379 issues. Liquidity and transparency are the two main hurdles. Traditionally, bond market has been limited to a handful of market players, such as banks, primary dealers and brokers, restricting its expansion. Bond-market intermediaries end up holding large portions of the deals they execute, which is not the case in the equity markets. With secondary markets also dormant in most tenors, intermediaries often end up holding the bonds to maturity, effectively leaving many banks with a fixed-rate loan on their books. Efforts, however, are being made to attract more investors, including retail ones, into the market with the introduction of tax-free bonds and also encouraging blue-chip issuers like the State Bank of India to tap this segment. For the financial year ending March 2013, the government has doubled the tax-free bond issues to Rs600bn. Various committees have recommended measures to expand the range of investors, but, so far, this has remained a pipe dream. Private placements were introduced as a means to help execute bond deals quicker, but this route has become a bane to the market. Nearly 90% of bonds sold in India are private placements – going to fewer than 49 investors – and a typical private placement goes to 10–15 investors, limiting the chances of secondary trading. The government is now seriously looking into the possibility of lifting retail participation to improve trading liquidity. Kalia’s office is considering one proposal that will make it mandatory for corporations to tap the bond market for their working capital needs. The move will create more supply and prompt more investors to look at corporate bonds as an investment option. According to a paper presented to the Ministry of Finance in May 2011, rupee bonds are still not being give

Source: Reuters/Adnan Abidi A supporter of Indian yoga guru Baba Ramdev takes part in Ramdev’s protest against corruption at the Ramlila grounds in New Delhi To see the digital version of this report, please click here. As opposed to its regional peers, India’s footprint in the offshore public debt markets has always seemed somewhat fragmented. Issuance has tended to come from the financial sector, while the larger corporate issuers have emerged on only a sporadic basis, and the lack of an offshore sovereign curve remains a perennial frustration. The absence of an offshore sovereign curve has again become a talking point in Indian financial circles. Numerous market participants has suggested that India should tap the offshore public debt markets in big size, not only to help Indian issuers in terms of benchmarking but also to relieve the downside pressure on the rupee – the currency has fallen more than 25% against the US dollar since the start of August 2011. A debut sovereign issue could make it easier for India’s corporate sector to access international capital – assuming their borrowings fit within some complex rules on overseas financing. The Reserve Bank of India, however, has long stated that a benchmark-sized foreign currency-denominated bond would pressure the country’s sizable fiscal deficit, and there is no sign that it has changed that view. Still, those DCM bankers hoping for a boost from a sovereign benchmark can take some heart from the likely arrival of a new sovereign proxy in the shape of India Infrastructure Finance Co. IIFCL has sent out RFPs for the establishment of a US$1bn MTN programme and indicated its interest in ultra-long tenors of up to 30 years. This is something of a U-turn for the government-owned infrastructure lender, which was forced to abandon plans to make its offshore market debut when the global financial crisis kicked in over three years ago. Barclays, Credit Suisse, Deutsche Bank, HSBC and Standard Chartered are working on establishing the MTN programme for IIFCL. Should the notes come with an explicit government guarantee, IIFCL would provide the first true India sovereign reference point for CDS, something which would aid in the pricing of Indian offshore debt. Until now, market participants have had to rely on Reliance Industries default swaps as the most liquid India proxy. The plan, however, comes against a deteriorating macroeconomic backdrop that threatens to push India into sub-investment grade territory after S&P put its BBB– rating on negative watch earlier this year. “The India story began to unravel with the poor growth numbers late last year and, as a result, issuance plummeted, with just Reliance able to get a deal done [it issued a US$1.5bn 10-year Global in February] and banks the only issuers able to gain traction. With many Indian companies facing higher offshore funding costs on outstanding debt, thanks to the weaker rupee, it takes the shine off the country’s corporates as a credit proposition,” said a regional syndicate head.Junk threat Stalling growth and a series of crippling power cuts in late July, which affected more than 600m people, have added to the sense that a significant injection of funds into infrastructure is needed urgently. Offshore issuance could well emerge in this area, perhaps through public-private partnerships, especially with long-term rates so low. Indeed, long tenors have been a feature of offshore issuance from India’s private sector, although it could be argued that these were bull-market trades when the BRICS economic miracle phase was at its peak. In 1997, Reliance Industries placed a century bond and, two years ago, managed to get a 30-year Global over the line, while Ballarpur Industries tapped the perp market in August last year. However, Ballarpur’s US$200m deal, which reopened the Asia high-yield market, after a two month closure, tanked in secondary and left a bitter taste that has lingered, with Bharti Airtel abandoning plans

Source: Reuters/Vivek Prakash An employee of Kingfisher Airlines works next to a counter closed sign at the carrier’s booking office at Mumbai’s airport To see the digital version of this report, please click here. When national carrier Air India finalised a jumbo Rs224.68bn (US$4.2bn) debt restructuring in April this year, one thing became abundantly clear – India Inc needed some major surgery. Air India’s restructuring was far from a surprise. The carrier has not posted a profit for the past five years and operates in an ailing industry suffering from intense competition, but what shook the corporate world was the sheer size of the loans involved. The carrier’s workout is the largest in India to date and the government’s need to turn around an inefficient national champion has clear implications for other companies across the public sector. Rating agency Crisil has hiked its earlier estimates on problem loans in the Indian banking system, saying restructured borrowings may reach Rs3.25trn in the two fiscal years from April 1 2011 to March 31 2013, up from earlier estimates of Rs2trn made as recently as April. Since April 2011, loans totalling Rs1.6trn have already been restructured, according to Crisil. These huge numbers not only hint at the extent of the toxic assets in the Indian banking system, but also reveal a determination to act. After years of simply rolling over bad loans – masking problem ones and allowing inefficient, loss-making companies to outlive their natural lives – lenders are finally taking action. The repercussions of a surge in restructurings have set alarm bells ringing all the way up to the Ministry of Finance. Concerned over the rise in the number of restructuring proposals and worried about potential abuse of the system, the government has introduced stricter rules for creditors and borrowers wishing to use the Corporate Debt Restructuring cell. In a directive to the CDR cell – a Reserve Bank of India-recognised restructuring forum backed by 55 Indian banks – the MoF’s department of financial services has proposed some immediate measures to ensure that debt restructuring is offered only in “viable” cases. The proposals are expected to come into force before the end of September. Any borrower can refer a proposal to the CDR cell once it wins the support of lenders representing a stake of at least a 20% in the total working capital or term loans of the company. This mechanism has become the preferred restructuring route in India, as it gives lenders an option to restructure an asset before it goes into default, while promoters view the CDR package as a lifeline. The government, however, is now asking the promoters to put up a greater amount of equity in return for additional working capital from lenders. Also proposed is a requirement for promoters that use the CDR cell to pledge 100% of their shares and provide unconditional personal guarantees. The government also wants lenders to do more due-diligence work before recommending a company for the CDR package. Lenders are also urged to consider a change in the management. Lenders are also asked to consider conversion of debt into equity only as a last resort. That option should be agreed only for listed companies and subject to a cap of 10% of total debt. The monitoring mechanism for companies taking CDR packages is also set to be tightened, while it is recommended that entities performing better than CDR projections, but refusing to exit from the CDR cell, need to be charged commercial interest rates. Banks may find some solace in the latest MoF missive, which stresses the need to establish the real cause for the restructuring – such as inefficient management, promoters diverting money or a cyclical downturn beyond a company’s control – before any case is even referred for such a move.Big repercussions The MoF has also asked banks for an immediate increase to 5% from 2% in their capital provisioning for restructured loans. While the measures will ensu

Source: Reuters/Jitendra Prakash Farmers use camels to transport their watermelons across the river Ganges at Neevna village on the outskirts of the city of Allahabad To see the digital version of this report, please click here. India’s ambitious privatisation plans carry the potential to provide good investment opportunities and, in the process, energise the stock market. However, amid regular scandals and doubts over the government’s ability to arrest an economic slowdown, there are no signs this will happen any time soon. Each year, the government announces targets to sell its stakes in public-sector entities as it looks to reduce the fiscal deficit. A number of companies are on the block as the state looks to reduce its ownership levels to 51% eventually. For the current fiscal year, ending March 31 2013, the federal government has set a target to raise Rs300bn (US$541m), but, to date, it has raised just Rs1.24bn. Appetite for these state-owned stocks is low even after a 12% gain so far this year in the benchmark Bombay Stock Exchange Sensitive Index, making it one of the better-performing markets in Asia in recent months. “The positive sentiment necessary before a disinvestment is not there,” said Sandeep Shah, head institutional sales at Fortune Equity Brokers. The fault largely lies with the economy. Growth of India’s gross domestic product fell to 5.5% in the quarter to June 30 after rising 8.4% annually for the two preceding fiscal years. The government has cut its GDP forecast for 2012–13 to 6.7% from the 7.5%–8.0% range it had projected earlier. In the past, the government indicated that India needed annual GDP growth of 9% for sustainable economic expansion.Reforms necessary The situation on the fiscal front is equally unappealing. The government’s estimate of the fiscal deficit as a percentage of GDP for 2012–13 is 5.1%, but analysts remain sceptical. In a research report, Morgan Stanley forecast a fiscal deficit of 6.1% in 2012–13, up from 5.9% in 2011–12. “The individual stocks [indentified for disinvestments] are good in their own space and the valuations may also be attractive, but the market is in a punishing mood,” said Jigar Shah, head of research at Maybank Kim Eng. In order to restore the appeal of the stake sales, bankers believe India needs to cut its high interest rates and implement reforms in the power and infrastructure sectors. These are the sectors in which most of the PSUs targeted for stake sales operate. Instead, the government has been spending time fighting charges of corruption. Recently, the Comptroller and Auditor General of India alleged that the Congress-led federal government underpriced the sale of coal blocks and this may have cost the exchequer potential revenue of US$33bn. Before the coal scandal, the government was accused of selling mobile phone frequency licences cheaply to benefit certain companies. However, analysts are not entirely writing off the current year’s disinvestment programme. Prithvi Haldea, chairman of Prime Database, a provider of data on capital market offerings, said the recent appointment of P. Chidambaram as finance minister should infuse some life into the disinvestment process. Chidambaram was the finance minister between 2004 and 2008 and is seen as more pro-reform than predecessor Pranab Mukherjee. Haldea sees two possible catalysts for the disinvestment process. The first is the government’s commitment to reduce the fiscal deficit, especially in view of the risk of a ratings downgrade. The second is a recent stock-market requirement that public sector companies need to have a minimum float of 25% come August 2013. In a research report, IDFC Securities said the government could be bolder in divesting. The target was to raise Rs300bn, but it could raise three times that from selling stakes of 10% each in the top 12 public-sector entities and lower the fiscal deficit 20%, it added. The government has already taken some initiatives. The Department of Disinves

Source: Reuters/Arko Datta A man sweeps the floor at a Buddhist temple in Dharamsala To see the digital version of this report, please click here. For much of this year, it was hard to see why anyone would consider investing in Indian convertible bonds again. A wave of over-exuberant issuance in 2007, before the equity market turned sour, had left around US$6bn of foreign currency CB redemptions for this year, and market watchers were predicting disaster as issuers scrambled for cash to meet obligations. “The year 2007 was characterised by Indian issuers across the size and quality spectrum tapping hunger for Indian equity growth and raising convertibles at aggressive structures, with most CBs having no coupon, 7%–8% back-ended yield and high conversion premiums,” said Mrinal Parekh from Deutsche Bank’s Asia equity-linked origination team. “The subsequent weaker equity markets and the significant depreciation in the Indian rupee versus the US dollar compounded the redemption woes for issuers,” Parekh added. Somehow, though, catastrophe was, for the most part, avoided. Now, not including deals already in the restructuring process, there are few redemptions remaining this year. CBs from Suzlon Energy with a total redemption value of US$209m are due in October, but the company has already shown its willingness to conduct asset sales and ability to secure new credit lines to meet a redemption earlier this year, and analysts are confident it will find the funds. Notably, issuers have come up with varied solutions. Software firm 3i Infotech completed an exchange offer for its zero coupon euro- and US dollar-denominated CBs due April and July, respectively, giving investors new coupon-paying convertibles. Subex also completed a cashless exchange offer in July, while Reliance Communications and JSW Steel took new loans to meet redemption obligations. “The overhang has pretty much gone. Whatever was going to be a problem has more or less played out,” said Nick Smith, head of Asia Pacific convertible bond origination at Barclays. There are just two benchmark-sized redemptions scheduled for 2013 and six for 2014. Investors in Indian CBs have not suffered the big losses they might have expected, although some have been forced to accept extensions of maturity. A dearth of new Asian CB issuance, far below the amount redeemed during the same period, coupled with a sense that the rupee and the Indian equity market have more potential for upside than downside, is convincing investors to put their money to work. “We’re seeing some of the larger Indian corporates start to show some interest in FCCBs again,” Smith added. One of the last potential problems was addressed when a US$150m issue from Jaiprakash Associates last month enabled it to take care of its September 12 redemption of US$523.56m. While the bond slipped to 98.5 in the aftermarket as its share price fell, it was an encouraging sign that investors were keen to buy into a new Indian issue with no asset swap available and a bond floor of just 85. It was the first Indian primary CB deal without credit hedging for around 18 months. Still, some believe that, even with the overhang lifted, the primary issuance market is open only to a select few Indian names. “Sentiment is still pretty dampened for Indian CBs,” said one equity-linked banker. “The ones that have been done so far have had some hedging ability or credit protection. It’s not just any Indian deal that can get done.” Issuers are also hampered by rules of the Reserve Bank of India, which limit new CBs to a minimum maturity of five years and cap the all-in cost of issuance at 500bp over Libor. “Now, investor preference for quality, liquid issuers with moderate valuations, coupled with the RBI minimum tenor and pricing guidelines, reduce the universe of potential FCCB issuers to high-credit-quality names, which also have access to cheap loans and local bonds without the forex volatility,” said Deutsche’s Parekh. “However, blue-chip

Anil Rustogi, president of Aditya Birla Nuvo To see the digital version of this report, please click here. Aditya Birla Nuvo is a US$4.5bn conglomerate and part of the Aditya Birla Group, one of India’s private sector champions. Known as Indian Rayon until 2005, when it was renamed Aditya Birla Nuvo, the manufacturing company has grown into a conglomerate including financial services, telecommunications, fashion and lifestyle, information technology and manufacturing businesses. Rustogi was instrumental in a US$900m three-part financing backing the acquisition of US-based Columbian Chemicals in June 2011 by the Aditya Birla Group. The financing won the IFR Asia Loan Deal of the Year for 2011. IFR: What are your company’s funding requirements for the next 18 months? RUSTOGI: We have planned capex of Rs6.74bn (US$121m) for the financial year ending March 2013 (FY13) and Rs4.5bn for FY14. IFR: What is the funding mix between equity and loans/bonds? RUSTOGI: The split between equity and loans/bonds is dependent on our leverage levels, which we and our lenders would be comfortable with. As of end-June 2012, our net debt to equity was at 0.63%, while our net debt to Ebitda was 4.5x. The net debt to Ebitda would have been lower at 3.98x, but for the delayed receipt of a government subsidy of Rs4.25bn. IFR: What are the main criteria that determine your preference for a particular mode of funding? RUSTOGI: Usually, we undertake equity funding to maintain leverage at reasonable levels or to fund long-term investments. We borrow through loans for capex funding and through domestic bonds for general corporate purposes. Our operations generate strong annual cash flows. For FY12, cash flow from operating activities was about Rs5bn, which essentially is equity funding. IFR: What part of your funding requirement is sourced from the domestic market? RUSTOGI: Our entire funding requirement is sourced from the domestic market, excepting loan funding for capex. IFR: How cost effective is it now to borrow offshore as compared to the domestic market? RUSTOGI: The cost-effectiveness of offshore borrowings, as compared to the domestic market, varies from time to time and depends, inter-alia, on swap levels at the time of borrowing as we hedge foreign exchange and interest-rate risk on offshore borrowings. Presently offshore loan borrowings are cheaper by about 200bp and 125bp, compared to domestic loan and bond market funding, respectively. IFR: Given that interest rates in international markets are low, do you have any plans to issue foreign currency bonds? RUSTOGI: We have no plans to issue foreign currency bonds as of now. IFR: How do you perceive perpetual bonds, which have caught on with issuers/investors in domestic and international markets? RUSTOGI: These are good for borrowers with high leverage levels and in need of increased equity. It is also a useful funding tool where there are limitations in terms of availability of equity. Moreover, with the existing depressed state of equity markets, in some cases issuing perpetual and hybrid bonds is a better alternative to raising funds through equity. IFR: Considering the ongoing crisis in the Eurozone, what challenges does your organisation face from a capital-markets perspective in the next 12–15 months? RUSTOGI: We have no immediate requirement of accessing capital markets for equity because, in May 2012, we issued warrants to the company promoters [founders] on a preferential basis to raise Rs15bn. Of this amount, 25% has already been received and the balance is expected within 18 months as per Indian capital markets regulations. Also, as explained above, as of now we have no plans to raise funds through offshore bonds. IFR: In light of the tight liquidity in funding markets, will you focus on achieving cost-effective pricing on your borrowings or will you be willing to pay up to achieve broader objectives? RUSTOGI: Fortunately, in view of our credit profile and reputation, our access to fund