MUMBAI Nov 5 India's central bank is examining
whether banks' recent purchases of low coupon corporate bonds
have potentially breached regulations and has asked banks to
provide more information, three people with direct knowledge of
the matter said.
The inquiries from the Reserve Bank of India, though
preliminary, are raising fears of stricter guidelines, these
sources said, citing emails or calls from central bank
officials, after sales of these low coupon bonds surged in the
current fiscal year.
Specifically, the RBI is examining whether banks are fully
following guidelines released in September 2010 mandating that
banks only buy zero coupon bonds if the issuer has set up a
"sinking fund" for all accrued interest during the maturity of
The sources said the RBI was examining whether issuers
avoided establishing the sinking fund by setting up low coupon
bonds that offered low interest and thus avoided meeting the
technical definition of a zero coupon bond, even if they shared
some of the same risks.
The RBI circular refers to zero coupon and not low-coupon
"There was an email sent asking for data on all low coupon
bonds," one source who had received the letter told Reuters,
adding the email referred specifically to the 2010 circular.
A central bank official declined to comment on the issue.
The RBI passed the 2010 guidelines because of concerns banks
would have little information on the issuer's cash flow and
hence would not be able to gauge the potential impact should the
company default at redemption.
Zero coupon bonds offer no interest during the tenure of the
bond, but promise a premium at redemption.
In India, banks arrange bond deals by buying the debt from
the issuer and then try to sell them on to mutual funds and
Zero- and low-coupon bonds are usually popular with issuers
undertaking a project with limited cash flows in the initial
period, or who want to replace high interest bearing loans.
Corporates have issued $735 million with coupon rates of 5
percent or below since the fiscal year started in April,
compared with $58.6 million in the 2011/12 period, according to
Thomson Reuters data, marking a more than 12-fold increase.
By contrast, zero coupon bond sales have dropped to $752
million in the fiscal year ending in March 2013, compared with
$2.76 billion in the previous financial year.
One of the sources with direct knowledge of the deal told
Reuters the RBI has also asked for more information from banks
if they have resold the bonds to other investors.
(Editing by Rafael Nam & Kim Coghill)