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The Rediff Business Interview/ M S Verma

'Investing in RIB would mean serving yourself and India'

Ever since Finance Minister Yashwant Sinha announced in his Budget speech that a special bond will be floated for non-resident Indians to mop up $ 2 billion, State Bank of India Chairman Maya Shankar Verma has been a busy man.

Busy because his brief was tough: raise $ 2 billion in one month. Thus was born the Resurgent India Bond. The issue opens on August 5 and closes on September 4, with August 17 marked for earliest closure.

The bonds are denominated in three currencies: dollar, pound sterling and deutsche mark. "The interest on the deposits for five years is quite good," says Verma. The dollar will carry a coupon of 7.75 per cent, pound sterling 8 per cent and DM 6.25 per cent. And the minimum investment required to buy RIBs is $ 2,000. "It is something which will give NRIs the best returns on their savings," he adds.

The SBI is the largest bank in India; it ranks among the top 25 commercial banks in Asia with assets exceeding $ 47 billion. With 8,900 branches in India and 51 offices in 34 countries, the bank's total deposits exceed $ 26 billion.

In an interview with Syed Firdaus Ashraf, Verma says NRIs would do well to note that investing in the RIBs would mean serving the country. Photographs by Jewella C Miranda.

What advantages would accrue to NRIs investing in the Resurgent India Bonds?

The biggest advantage is that it is a very profitable investment. Returns are excellent.

Secondly, it is tax-efficient. There are a number of taxes which are not applicable to the people investing in RIBs. The NRIs can check that in the offer document.

Thirdly, if an NRI desires to gift the bond to somebody, he can always do that. And the recipient also enjoys the same tax benefits which the subscriber gets.

Lastly, the RIB is structured in such a way that the NRIs can make profit by participating in nation-building.

Why are the instruments called Resurgent India Bonds?

This is to remind the NRIs of the present character of our nation. The nation is in a resurgent mood. And when you recall the picture of the country, our own mother country, we would like them to recall that India today is resurgent. So, they should realise while putting their money that they are putting their money in the resurgence of India. Every single Indian national today is interested in India's resurgence. And that is why we thought that the best name to call the bond must be: Resurgent India Bond.

How different do you think is the RIB from the India Development Bonds or foreign currency for non residents (b)?

For IDBs, the occasion was different altogether. But the basic elements of RIBs and IDBs are the same since both of them are tax-efficient instruments. In IDBs, we targeted the NRIs and the OCBs (overseas corporate bodies). This time too the target is same.

After Finance Minister Yashwant Sinha presented his Budget, we felt there was a desire among NRIs to invest in the infrastructure growth of the country. And that is why when we structured this instrument we have mentioned that the entire amount will go for the development of the infrastructure of the country. We think the subscriptions will be the earnings of NRIs.

We have a $ 8 billion corpus in the FCNR(b). Do you think there will be a flow of funds from this account to the RIBs? Or will there be a fresh flow of funds?

On the contrary, we expect the majority of funds that will come into the RIB will be fresh funds. Technically, though, there can be some conversion from FCNR(b) to RIB. For example, we believe the FCNR(b) is largely a shorter term investment whereas the RIB is a longer term investment. You put your money for five years largely. So, the money flows in the FCNR(b) and the RIB will be very largely independent.

However, I feel there may be some instances where some people who have their money in three year FCNR(b) will convert a portion of that into the RIB.

SBI estimates that not more than 10 to 15 per cent of the FCNR(b) will come to RIBs as a result of conversion.

What about the exchange rate risk? Who will bear this risk, what with the economic slowdown in South-East Asia and the turmoil in Asian currencies?

I don't really think NRIs have to be concerned about the exchange rate risk. The NRIs are risk-free.

SBI is one of the largest banks in the world, perhaps among the top three or four banks in Asia. The NRIs should not concern themselves about the SBI not meeting its liabilities.

SBI's own earnings every year are in the order of a half-a-billion dollars which we expect to grow to by a billion every year in the next three to four years. So, I don't think there is anything to feel concerned about. And I feel there is no such concern. But coming back to your question about how the exchange risk is shared. This is being shared by us with the Government of India.

When the deutsche mark gets converted into Euromoney, don't you think there will be some confusion in conversion?

We have already clarified that in our offer document. Once the Euro becomes the currency of Europe, at that point of time, depending upon the official rate of exchange then prevailing, the DM will be converted into Euromoney. So, the bonds and its proceeds will be paid in Euro.

Why is the minimum subscription amount $ 2,000? Don't you think the amount is too high? There are a number of students and moderately paid professionals who would wish to contribute to the RIBs in some way.

$ 2,000 is a fairly low amount for a five-year investment. At one point of time, we wanted to keep the figure at $ 5,000, but we scaled it down to $ 2,000. I don't think anybody will want to save less than $ 2000 in RIBs.

Critics say banks are already flush with funds. So what is the point in having excess liquidity? Do you seriously believe that this fund will help the infrastructure build-up?

We are talking of a five-year horizon. This slow movement of credit offtake is a very temporary affair. We think the infrastructure sector would start demanding for money within one or two quarters. A very large number of projects are on our own books. At present we have about 50 projects, the value of which would be more than Rs 400 billion.

So, it's not that there is no requirement of funds. But you are right that we will not put this fund in seven days or 15 days time. It will take us maybe four to six months to invest it properly. Not exactly invest it. Select it for selective infrastructure projects. In the interim, we can certainly put it in liquid instruments like money market instruments or treasury bills.

Is it true that the SBI is trying to put some money abroad for external commercial borrowings for corporates?

That's right. We will keep a part of it outside. And we will be meeting the requirements of the large infrastructure projects who need external commercial borrowing as a part of the project costs.

Do you think there is a heightened sense of patriotism among NRIs after the sanctions?

Certainly. My firm belief is that no Indian is less patriotic. I am quite confident about NRIs' patriotism. I am sure each one of the people staying abroad will subscribe to this special effort. Because the RIBs besides being patriotic is the best investment opportunity for any NRIs. So you are serving yourself and the country.

The J P Morgan report on RIBs states that the Centre will end up spending Rs 8 billion towards the exchange risk of a corpus of $ 2 billion if the annual depreciation of the rupee is pegged at six per cent. Besides, it is felt the cost of this subsidy is so high that a significant portion of the RIB may not even create any additional inflows?

Every analyst has his own way of thinking. And there are too many ifs and buts in every analysis. They are going by a six per cent depreciation. And that is a highly debatable matter. That's one. Secondly, as I mentioned earlier, the risk is being shared by the bank and the government. I don't think the premise on which this kind of analysis is made is acceptable.

What is the total liability in debt to NRIs after five years? I mean, what will be the outgoings?

The outgoing... again one has to understand it. There are two types of bonds. One is where we are paying the interest rate. The other is the whole thing which is cumulative.

It will depend upon what is cumulative and what is non-cumulative. Another thing is, how many of such bonds will become resident? For example, in the IDB which was subscribed for $ 1.8 billion, the actual outgo was much below $ 1 billion.

Because by then many subscribers had come to India and became Indian citizens. Many of these bonds were also gifted to relatives etc. So, I will not be surprised if not more than 40 to 45 per cent of the entire money which is raised through these bonds is finally found to be repatriated or needed to be repatriated.

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