‘Diaspora Bonds’

‘Diaspora Bonds’

June 25th, 2013

India thinks over ‘Diaspora Bonds’
India is examining to introduce “Diaspora Bonds” to attract investment from NRIs (Non-Resident Indians), to facilitate greater inflow of funds in the infrastructure sector. The government is examining longer-term investment instruments for overseas Indians so that the NRI community could participate and benefit from India’s growth.
Current Status: At present most of the diaspora investments are in portfolio investments of a short-term nature.
Plan of Govt: The government is considering the option of ‘diaspora bonds’ for longer-term investment instruments to provide opportunities for overseas Indians and thus facilitate greater inflow of funds in the infrastructure sector.
What are Diaspora Bonds (DBs)?

• A sovereign bond that targets investors that have emmigrated to other countries and the relatives of those emmigrants. For example, the Government of India tries to sell a government bond to Americans of Indian origin. Diaspora bonds are marketed to members of the diaspora.

Attraction for issuing countries:

• “Patriotic discount” - Diaspora investors sometimes offer what is called a “patriotic” discount to governments in their country of origin/ancestry. As per George Washington University’s Liesl Riddle, when diaspora members invest in their homelands, they are motivated by more than just profit: “Social and emotional motivations also play a role.”
• Stable source of finance, especially in bad times
• Support to sovereign credit rating
• Diaspora investors might be willing to accept a lower rate of return and have a greater tolerance for uncertainty when buying diaspora bonds than a mainstream investment.
• Diaspora investors might partially view the purchase of a diaspora bond as an act of charity and might also have a greater understanding of a country’s level of risk than other foreign investors.

Attraction for investors:

• Patriotism & desire to do “good” in the country of origin
• Risk management – Diaspora investors are likely to view the risk of receiving debt service in local currency with much less apprehensions.

What is difference b/w Foreign Currency Deposits (FCDs) and  DBs ?

Foreign Currency Deposits (FCDs) are also used by countries to attract foreign currency inflows.

• But, Diaspora bonds are typically long-dated securities to be redeemed only upon maturity. FCDs, in contrast, can be withdrawn at any time.
• FCDs are likely to be much more volatile, requiring banks to hold much larger reserves against their FCD liabilities, thus decreasing their ability to fund investments. Diaspora bonds, on the other hand are a source of foreign financing that is long-term in nature.

What is India’s Experience in DBs?
Diaspora bonds are not yet widely used as a development financing instrument. Diaspora bonds issued by the government-owned State Bank of India (SBI) have raised over $11 billion to date.
3 separate occasions on which the Indian government has tapped its diaspora base of non-resident Indians (NRIs) for funding on –

1. India Development Bonds (IDBs) following the balance of payments crisis in 1991 ($1.6 billion)
2. Resurgent India Bonds (RIBs) following the imposition of sanctions in the wake of the nuclear explosions in 1998 ($4.2 billion)
3. India Millennium Deposits (IMDs) in 2000 ($5.5 billion).

Features of the IDBs, RIBs and IMDs:

• Opportunistic issuance in 1991, 1998 and 2000
• Balance of payments support
• Fixed rate bonds
• Maturitiy: 5 year bullet maturity
• Limited to diaspora
• No SEC registration
• Non-negotiable
• SBI distribution in conjunction with international banks. The conduit for these transactions was the government-owned State Bank of India (SBI). Thus, the proceeds from such bonds can be used to finance investment.
• Issues were done  in multiple currencies – US dollar, British pound, Deutsche Mark/Euro.