Bogged down by the RIB boot

The RIB issue also erased the record set by India Development Bond issue which raised over 1.6 billion in early 8217;90s. Over Rs 8,500 crore 8212; nearly 50 per cent of the total collection 8212; was brought in by the NRIs in the Middle-East, mainly in the UAE. NRIs in US and Europe sent 30 per cent while South-East Asia the balance 20 per cent of the amount.

Looking at the bonanza on offer, even Indian exporters 8212; who are facing a recession 8212; met the Reserve Bank governor and SBI chairman asking them to convert their EEFC accounts funds into RIBs. Though the request was turned down, it certainly highlighted the so-called recession8217; in the country.

Many experts feel that a large chunk of the collection is black money routed through the RIBs. As there is no wealth tax or gift tax or income tax involved, it is convenient for black money holders to white-wash8217; their illegal funds. Several local businessmen bought the RIBs through their NRI friends and relatives. This can be later transferred in their names. They also used overseas corporate bodies OCBs and, if SBI sources are to be believed, bulk of the funds came through this route. Another school of thought has it that money was diverted from FCNR foreign currency non-resident accounts to RIBs.

Even as the SBI is gloating over the success of the RIB issue, many questions are being raised over the life after the RIB issue. Will the government be able to manage the foreign exchange risk arising out of the rupee depreciation? Will SBI be able to plough in the collected amount prudently in core sector projects? Will the sudden inflow of huge funds lead to monetary expansion and inflation?

SBI chairman M S Verma says it the RIB collection was a record difficult to beat. No doubt, the foreign exchange reserves of the country will shoot past the 30 billion mark from the current level of 26.60 billion level. It was also a slap on the face of Moody8217;s and Standard amp; Poor8217;s which downgraded India8217;s rating outlook and dampened the prospects for Indian companies to raise funds from abroad. It was also a fitting reply to countries like the US and others which imposed sanctions after the nuclear explosions earlier it was believed that sanctions will affect fund inflows to the tune of 2-3 billion.

However, it is going to be an onerous task for the bankers and the government to successfully deploy the funds 8212; that too in infrastructure projects as announced by the bankers 8212; and repose the confidence shown by the NRIs at a time when dark clouds are gathering over the economic horizon. Banks and financial institutions are already facing the dilemma of finding suitable takers for funds.

As a result of the depression in the capital market, not many projects are taking shape and companies have put on hold major expansions and diversifications. Coming to infrastructure projects, not much headway has been made in any of the areas like port, telecom, power and roads. Indian companies and multinationals are still cursing the government for lack of clear policies, especially in telecom.

The foreign exchange risk is another area where today8217;s glory can become tomorrow8217;s grief. When the RIB was floated, the rupee was 42.50 against the dollar. Considering the fact that the rupee has depreciated from 35.70 to 42.50 in the last one year 8212; a decline of nearly 20 per cent 8212; what is the guarantee that the rupee will not depreciate by another 100 per cent in the next five years? If this is the case, then the government will have to shell out more than double the money it collected. Add the interest payments and the cost of servicing the RIBs will shoot up.

Therefore, it would not be improper to say that while the government, SBI and the investors would gain, it would be nation8217;s taxpayers who will have to take the final hit.

Another issue which was not highlighted during the RIB launch the interest offered on the RIBs was the highest. At 7.75 per cent for US dollar investments, the RIB was the best bond on offer in the entire world during this time. 8220;One should not remain with the illusion that NRIs and OCBs invested in the bonds due to patriotism, it was pure profit motive. The bonds were tax-free and was offering interest rates far above the usual FCNR B accounts. The NRIs and OCBs jumped on the offer,8221; admitted an SBI official. But do the country8217;s taxpayers can afford such a high cost issue? Only time will tell.

The deployment of RIB funds is going to be crucial for the country and its economy. Verma said they are planning to keep 1 billion abroad and depending on the necessity, it will bring in or invest dollars abroad. 8220;The financial world has changed tremendously due to technology, we can bring in or send dollars abroad in seconds,8221; Verma said.

As the funds would be used to restructure country8217;s dilapidated infrastructure, faster clearances to these projects is a necessity. Most of India8217;s power and telecom projects are in coma. Barring private cellphones in the metro cities, the basic telephone projects have not taken off at all. The gestation period for such projects is also long and it will take half a dozen years for them to take off. On the other hand, most of the foreign as well as Indian investors are now planning to jettison their projects.

The state of power projects is nothing to write home about. The politics over Enron8217;s Dabhol project is a test case of India8217;s power privatisation plan. The fate of another fast-track power project in Karnataka, to be set up by Cogentrix is still not certain. After six long years, the Hindujas received the counter guarantee from the Union government for its 1040 MW power project in Andhra Pradesh. The private airports like Tata8217;s Bangalore project are still-born. It is, therefore, not surprising that even the government-owned FIs are hesitant to invest in the infrastructure sector.

Thus, in this scenario, the SBI will have no alternative but to finally invest its mega funds into government securities. Verma has already announced that they are looking at government securities for fund deployment. It has also given the foreign exchange to the RBI to fight the rupee8217;s depreciation against the dollar at a time when the entire world currencies are falling consistently.

Life after the RIB issue is not going to be an easy task for the bankers and the government. The country needs prudent policies and projects to live up to the expectations of NRIs. The real jubilation will come only after that.