(Repeats to more subscribers)
By Archana Narayanan and Suvashree Dey Choudhury
MUMBAI Feb 6 India's IDBI Bank Ltd
has upset holders of $140 million of its bonds after urging them
to accept a change in terms that gives the mid-sized state
lender the right to write down the debt or convert it into
A letter IDBI sent to investors, dated Jan. 30 and seen by
Reuters, has angered some holders who see the new terms as
unfavourable and say they have not been offered any compensation
for taking on additional risk.
IDBI wants to make the bonds comply with global banking
rules known as Basel III, where a common clause means the issuer
can write down the debt or convert it into common shares,
sending debt holders to the back of the queue in any asset
An official at a domestic institution that holds the IDBI
paper said he didn't want to convert to Basel III, but there was
no other option in the letter.
Contacted by Reuters, IDBI Chairman and Managing Director
M.S. Raghavan said the lender was ready to offer additional
compensation and investors had the option to hold onto the debt
under existing terms.
"We are not going to forcibly convert these bonds. It is
only an option that we are trying to judge from the investors,"
"If the letter sounds like we are not giving them any
option, then we will edit and resend the letter," he said.
Basel III-compliant bond sales by Indian banks have been
under fire from fund managers and analysts, who see them as
offering low compensation without sufficient explanation about
"We have avoided recommending or investing in bank perpetual
and upper Tier II as we have never found the spreads on offer
commensurate to the risk," said Arvind Chari, head of fixed
income and alternatives at Quantum Advisors.
Indian banks need to raise at least 5 trillion rupees
($79.97 billion) in capital to comply with Basel III norms by
At present, many Indian banks are struggling with bad debts
and weak profitability. As a result, they want to limit their
In developed markets, a Basel III Tier I bond is priced
about 250-300 basis points above Basel II. Yes Bank Ltd
, the first Indian bank to issue under the new rules,
sold a Basel III Tier I at 10.5 percent, although dealers said
traders felt it should have yielded around 14 percent.
Another investor in the IDBI debt said the letter from the
bank imposed a completely new structure without mentioning any
change in the pricing.
"We feel pushed to accept a tighter spread despite higher
IDBI raised nearly 9 billion rupees ($143.73 million) of the
Basel II perpetual Tier I bonds at 9.40 percent in December
2012, before Basel III rules were implemented.
The perceived mispricing is also being influenced by credit
agencies, which have assigned top ratings with the understanding
that banks in India would be backed by the government.
IDBI Bank's net profit in the October-December quarter
plunged 75 percent, so far the steepest among mid- and
large-size banks in India, as net bad loans rose to 2.9 percent
of total assets, from 1.93 percent.
($1 = 62.5350 Indian rupees)
(Editing by Rafael Nam and Richard Borsuk)