KERALA FIRST INDIAN STATE TO TAP INTO MASALA BOND MARKET

Relevant for prelims and GS paper 3

Kerala Chief Minister Pinarayi Vijayan opened Friday’s trading on the London Stock Exchange by ringing the iconic bell after the state-owned Kerala Infrastructure Investment Fund Board (KIIFB) debuted its ‘masala bond’ issue of Rs 2,150 crore on the bourse.

While Kerala is the first Indian state to tap into the market for masala bonds — debt papers sold overseas by an Indian entity that are denominated in rupees — to raise development funds, the move is rarer still for a communist government.

After the bond issue debut, KIIFB became the first sub-sovereign entity in India to tap the offshore rupee international bond market. A brainchild of state Finance Minister Thomas Issac, the proceeds from the bond issue are slated to be used to part-finance the rebuilding of infrastructure in Kerala that was devastated by last year’s floods. The secured fixed-rate bond has a five-year tenor with a 9.723 per cent coupon. The bond issue builds on the Kerala government’s focus to get multinational corporations to invest in the state, which has traditionally been known for its unfriendly business policies, bureaucratic delays and recurrent industrial strikes.

KIIFB is a state agency that mobilises fund for infrastructural projects, over and beyond funds earmarked in the budgets. In the last three state budgets, Isaac, who is heavily banking on KIIFB funds, had announced projects worth Rs 50,000 crore funded by the agency. Of these, projects worth Rs 9,900 crore are in the process of tendering or implementation. Canadian investor CDPQ was the anchor investor in the masala bond issue.

“This is a milestone transaction for KIIFB and Kerala. KIIFB is the first sub-sovereign entity in India to access the international debt capital markets in this manner. This transaction has accomplished our objective of diversifying our sources of funding by accessing capital from international investors,” KIIFB CEO KM Abraham said at the launch.

Isaac had earlier stated that the KIIFB was securitising future revenue. The government passes on a share of the motor vehicles tax and cess on petroleum products to KIIFB every year. KIIFB will be able to meet all debt serving obligations arising out of these borrowing just from the revenue escrowed by the government, he had said. KIIFB came into existence in November 1999 to handle the investment bonds of the state government, as per the Kerala Infrastructure Investment Fund Act. But it was in 2016 that the present CPI (M)-led government changed the role of KIIFB from handler of investment bonds to an entity to mobilise resources for developmental projects over and beyond the budget. The new role of the KIIFB was first announced by Isaac in the budget of 2016-17, and in other two succeeding budgets, Isaac had heavily banked upon the KIIFB funds to boost the state’s infrastructure development.

Given that CDPQ was the anchor investor in the bond issue, the Opposition has alleged that investment by CDPQ is a proxy for investment by Canadian firm SNC Lavalin, which had been alleged involved in a multi-crore corruption case pertaining to renovation of three power projects in Kerala two decades back when Vijayan was the electricity minister in the then Left government. Vijayan was an accused in the corruption case that was probed by CBI, but a special court had allowed a discharge petition and cleared him of all charges.