MUMBAI IDBI Bank Ltd (IDBI.NS) has upset holders of $140 million of its bonds after urging them to accept a change in terms that gives the mid-sized state lender the right to write down the debt or convert it into shares.
A letter IDBI sent to investors, dated January 30 and seen by Reuters, has angered some holders who see the new terms as unfavourable and say they have not been offered any compensation for taking on additional risk.
IDBI wants to make the bonds comply with global banking rules known as Basel III, where a common clause means the issuer can write down the debt or convert it into common shares, sending debt holders to the back of the queue in any asset recovery process.
An official at a domestic institution that holds the IDBI paper said he didn't want to convert to Basel III, but there was no other option in the letter.
Contacted by Reuters, IDBI Chairman and Managing Director M.S. Raghavan said the lender was ready to offer additional compensation and investors had the option to hold onto the debt under existing terms.
"We are not going to forcibly convert these bonds. It is only an option that we are trying to judge from the investors," Raghavan said.
"If the letter sounds like we are not giving them any option, then we will edit and resend the letter," he said.
Basel III-compliant bond sales by Indian banks have been under fire from fund managers and analysts, who see them as offering low compensation without sufficient explanation about the risks.
"We have avoided recommending or investing in bank perpetual and upper Tier II as we have never found the spreads on offer commensurate to the risk," said Arvind Chari, head of fixed income and alternatives at Quantum Advisors.
Indian banks need to raise at least 5 trillion rupees in capital to comply with Basel III norms by March 2018.
At present, many Indian banks are struggling with bad debts and weak profitability. As a result, they want to limit their borrowing costs.
In developed markets, a Basel III Tier I bond is priced about 250-300 basis points above Basel II. Yes Bank Ltd (YESB.NS), the first Indian bank to issue under the new rules, sold a Basel III Tier I at 10.5 percent, although dealers said traders felt it should have yielded around 14 percent.
Another investor in the IDBI debt said the letter from the bank imposed a completely new structure without mentioning any change in the pricing.
"We feel pushed to accept a tighter spread despite higher risk."
IDBI raised nearly 9 billion rupees of the Basel II perpetual Tier I bonds at 9.40 percent in December 2012, before Basel III rules were implemented.
The perceived mispricing is also being influenced by credit agencies, which have assigned top ratings with the understanding that banks in India would be backed by the government.
IDBI Bank's net profit in the October-December quarter plunged 75 percent, so far the steepest among mid- and large-size banks in India, as net bad loans rose to 2.9 percent of total assets, from 1.93 percent.
(Editing by Rafael Nam and Richard Borsuk)