The Hindu Business Line : IOB raises Rs 200 crore of perpetual bonds

Indian Overseas Bank (IOB) today raised Rs 200 crore through an issue of `perpetual bonds,' the first bank to use this means of funding. These bonds carry an interest rate of 9.3 per cent, payable every half year.

Perpetual bonds are those in which the investor does not have the option to ask for the money back. But the issuer has the right to pay back investors and redeem the bonds after a period of time. Typically, pension funds and insurance companies subscribe to perpetual bonds. The Reserve Bank of India has allowed these bonds to qualify as

Tier-I capital.

IOB's Board of Directors today cleared a proposal to raise Rs 300 crore. The bank, however, raised only Rs 200 crore. Asked about this, Mr C. Rangarajan, Assistant General Manager (Funds), who was authorised by the bank to talk to journalists about the issue, said that `perpetual bonds' being a new kind of instrument in India, IOB had preferred to go for Rs 200 crore only.

IOB has the (call) option to redeem the bonds after ten years. If it does not exercise this option, it would have to pay investors 0.5 per cent more, or 9.8 per cent as interest.

The rating agency, ICRA, has rated these bonds LAA (L double A), which is one notch below the LAA+ rating assigned to the Rs 550 crore subordinated bond (Tier-II) programme of IOB. (In 2005-06, IOB raised Rs 750 crore through three issues of subordinated bonds, of which the last two amounted to Rs 550 crore.)

"The one notch lower rating assigned to the perpetual bonds reflect the specific features of these instruments wherein the debt servicing is additionally linked to meeting the regulatory norms on capitalisation and reported profitability," says ICRA. With this issue, IOB's capital adequacy ratio stands increased to 12 per cent.