Tradeability of recap bonds a complex, challenging issue: YV Reddy

“Even in the private sector, if there’s a massive crisis, the government bails out,” he said According to Reddy, in a way it’s not a banking crisis but a serious stress to the system. “So unlike many other developing countries, we have the policy freedom — no conditionality, no gun pointed on your head. So policy makers have adequate freedom. In terms of fiscal monetary implications, this (recap bonds) is acceptable,” he said.

“What the government is saying is that I will assume the risk. The equity holder will assume the risk, The government is saying that I will acquire the debt liability and create assets. If they are able to get a return above the cost of borrowing, then there’s no fiscal burden. Dividend plus appreciation…. that’s not unreasonable,” he said. Reddy said that there would be windfall gains for private shareholders when the government puts the equity in public banks.

Comparing the latest recap bond issue with that in the early 90s, Reddy said, “last time (in the early 90s), recap bonds were given to individual banks through a bond issue. But at that time, the government had 100 per cent ownership in banks and whatever I injected was at my terms and conditions.”

“Now I’m one of the parties. There’s private and government shareholding. Now the government is putting in equity and the private sector is on par. Otherwise, there’s windfall gains for private shareholders,” Reddy said.

“When you see shares of private sector banks going up, it means they expect the government to take more burden. But like any other owner how can you do it? The main difference is how the government should ensure the terms and conditions of recapitalisation… there are two legs — equity and bonds,” Reddy said. In those days bonds were structured in a crude manner. “But now the market is developed. Now the design of the bond, terms and conditions of the bond, tradeability of the bond… that becomes a more complex issue. It’s more challenging,” he said.

“The other leg is equity. When you are providing equity, you are providing along with private equity. Technically you should give an option like a rights issue,” Reddy said. “If they don’t pick up somebody else may pick up. The whole issue therefore is you are going through a process of more market oriented way.”