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India's strong economic fundamentals, low inflation and interest rates on a declining trend are ideal for bond investors, writes a financial markets expert. London & Partners, the Mayor of London's official business development company, has long been focusing on attracting inward investments into London, which is arguably the cultural and business capital of the world. This initiative, which started well before Brexit, sought to reinforce London as the gateway between America and Asia. It could become very important for London if it loses access to the Passport to European Financial after the UK exits the European Union (EU). The London Stock Exchange (LSE) is an important institution in the City of London and has long attracted international companies to list in London. This has included many companies from South Asia. At present, there are over 70 companies from India which have listed and raised strategic equity capital through IPO and follow-on offerings, which is about twice the number in New York, Toronto, Singapore and Frankfurt combined. The London Stock Exchange and UK Listing Authority offer the highest standards of disclosure and regulatory oversight whilst remaining accessible, flexible and predictable in facilitating listing. By listing in London, Indian companies can look for investors in a much larger capital pool than is available domestically in India. The LSE helps companies to raise their profile overseas, as it brings the listing company to the attention of London's deep pool of global investors and analysts. This is particularly valuable for the growing number of Indian companies which are seeking to export products and services to global markets. In the last year, we have seen an increase in the issuance 'Masala' bonds (Indian Rupee- denominated Bonds issued by Indian entities but sold internationally). Although these bonds trade on the over-the-counter (OTC) market rather than on an Exchange, they are often listed on Exchanges as most institutional investors require a listing for instruments to be eligible for investment.
Housing Development Finance Corporation (HDFC) launched the first Masala Bond in July 2016, raising nearly 3,000 crore rupees ($350mn); this was a landmark issue and it was listed in London. This helped to cement the LSE's clear position as the leading global listing venue for offshore Rupee denominated instruments: both stocks and bonds. A number of other Indian issuers have followed HDFC and have issued Masala Bonds. There are currently eight or nine Masala bonds outstanding and listed on the London Stock Exchange with a combined outstanding value of INR 210 billion (about $3.2bn) One notable bond issue was by the state-owned National Thermal Power Corporation (NTPC) listed world′s first Indian green masala bonds raising Rs 2,000 crore ($300mn), which had a yield of 7.48 per cent and a five-year maturity. Another notable listing on the LSE was the world's first Indian Fixed-Income Exchange Traded Fund (ETF), which was launched by Sun Global Investments in London in November 2015. This fund is known as the LAM Sun Global Zyfin India Sovereign Enterprise Bond UCITS ETF but is better known by its LSE ticker (CURY:LN) - still the only vehicle which offers smaller foreign investors the chance to get exposure to Indian fixed-Income. Moreover, it does so in a very liquid form as the shares trade on the London Stock Exchange like any other share. The ETF has been very successful and the GBP-denominated shares have risen by nearly over 37 per cent in the nearly two years since the launch. This performance was helped by Brexit, which led to sharp decline in the value of the GBP and thus boosted the GBP value of the Rupee denominated bonds that the ETF invests in. However, this was not the only reason. The performance of the underlying bonds and the rupee has been impressive and the US dollar tranche has advanced over 17 per cent since the launch. The Euro Tranche, which is listed on the Frankfurt Stock Exchange, is up 8.7 per cent over the same period. These are very impressive returns for bonds in a world which interest rates and bond yields are negative or very low. Investors are increasingly attracted by India's macro-economic fundamentals. Despite the problems and dislocation caused by demonetisation, India is again likely to be the fastest growing major economy in FY 2017 and FY 2018 with GDP growth at around 7.1 per cent. International Investors are looking beyond equities, particularly at bonds, which have not been on their radar to the same extent as equities. As India's economic fundamentals continue to be strong, inflation is low and interest rates are on a declining trend - these are the ideal conditions for bond investors. International investors are increasingly looking at this as rupee bond yields are still quite high (nominal yields of at least 7.5% across the curve). This looks attractive compared to alternative markets such as developed bond markets where yields are very low or negative. There is an increasingly wider range of companies looking at London to issue Indian rupee denominated debt securities, and a steadily growing pool of international capital ready to buy such bonds. Coal India Limited, the world′s largest coal miner, is reportedly considering an equity listing at the LSE; this listing will be another feather in the cap for the LSE. The UK-India investment relationship is an important factor. India is now the third largest investor and second largest job creator in the UK; the UK is the largest G20 investor in India and plays an important role in building skills in the Indian workforce. India has a huge range of investment opportunities and trillions of US dollars of infrastructure that needs that need to be financed. The financial sector of London has huge pools of capital looking for attractive investment opportunities. In addition, London has vast legal banking and financial structuring expertise. It also has the London Stock Exchange which is the world's largest and most international listing venues. This pattern of characteristics means that India and London are natural partners. We expect many new Indian financial instruments to be structured, traded and listed in London in the next few years. Mihir Kapadia is CEO of Sun Global Investments.
