Indian groups face valuation losses on dollar bonds

Indian companies are expected to take valuation losses on foreign currency bonds amid rupee depreciation.
Tata Motors, which also has foreign currency borrowings, is expected to be affected in the coming quarter.
Tata Motors, which also has foreign currency borrowings, is expected to be affected in the coming quarter.

These are tough times for Indian companies. Despite the bounce towards the end of this week, the Indian rupee has depreciated close to 20% since May.

Indian groups sustained valuation losses on foreign borrowings during the first quarter ended June and, unless there is a sharp reversal, they are expected to continue to do so in the coming quarter.

The country's largest refiner, Indian Oil Corp, incurred Rs40 billion ($591 million) of foreign exchange losses during the first quarter, due to valuation losses on its foreign borrowings. These are notional losses but hit the company's profit and loss statement nonetheless. According to one analyst report, the company has $12 billion worth of foreign debt, which is mostly unhedged.

Elsewhere, Tata Motors, which also has foreign currency borrowings, is expected to be affected in the coming quarter. “As the rupee weakens, we have had to take the valuation difference,” said C Ramakrishnan, CFO of Tata Motors. “During the last quarter alone, we took a valuation loss of about Rs1.54 billion in our profit and loss statement,” he added.

Companies will have to take short-term pain but the rating agencies expect them to manage. According to a Fitch report, the majority of rated industrial companies in India have hedging arrangements in place, which will help to minimise reductions in operating cash flow resulting from the rupee rout.

The government is desperately trying to stem the tide of outflows - which has destabilised the rupee and affected companies, along with some 1.2 billion of people. In July, chief economic advisor Raghuram Rajan, who is the incoming Reserve Bank of India governor, called foreign banks to his office to discuss how to attract inflows into the country.

The central bank is expected to come up with measures to liberalise rules on offshore borrowings - which would help ease selling pressure on the rupee. It has asked state-owned enterprises India Infrastructure Finance, Power Finance Corp and Rural Electrification Corp to tap the dollar bond market.

It could also allow companies to borrow offshore for shorter maturities. At present, RBI guidelines restrict companies from borrowing more than $20 million for a maturity of less than five years. This is well intentioned - and aimed at reducing short-term foreign debt.

However, bankers have proposed to reduce the tenor cap from five years to three years. “For many of the banks that want to borrow, the sweet spot is three years. We hear the government might consider reducing the tenor cap from five to three,” said one Mumbai based banker.

The central bank is also said to be considering reducing the withholding taxes on US dollar bonds from 20% to 5%, which could open the door to more dollar issuance. At present, most Indian companies need to pay a withholding tax of 20% unless they are using the funds offshore or are in the infrastructure sector.

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