Problem with KIIFB is not the interest rate, but the confusion it generates

KIIFB's decision to mop up Rs 2,150 crore through 'masala' bonds has always been a matter of dispute.

Thiruvananthapuram: The processes that drive Kerala Infrastructure Investment Fund Board (KIIFB) are so complex that even contradictory interpretations of a financial decision taken by the Board can sound convincing.

If all opposing arguments can seem right, it is also a sign of utter confusion.

It was this confusion surrounding KIIFB that was laid bare in the Assembly on Wednesday. KIIFB's decision to mop up Rs 2,150 crore through 'masala' bonds has always been a matter of dispute.

These bonds are termed 'masala' because the transaction is in rupees.

Though christened 'masala', and is rupee-based, these bonds are listed on the London Stock Exchange. Chief Minister Pinarayi Vijayan, attired in an ink blue Nehru jacket, opened the KIIFB's masala bond trade in the London Stock Exchange on May 17, 2019, by sounding the iconic gong was historic. Ironic, too.

 Pinarayi London
Chief Minister Pinarayi Vijayan had opened the KIIFB's masala bond trade in the London Stock Exchange on May 17, 2019.

Historic, because Pinarayi was the first Chief Minister from India to be invited to open trading at the LSE. Ironic, because it was a Marxist leader who was doing the honours in the den of capitalism.

Nonetheless, it was not a Marxist's presence at the LSE that had bothered the UDF. For them, the interest paid for the masala bonds, 9.723%, was exorbitant.

It was said that the KIIFB coupon rate was the highest ever. It was at least two percent higher than the rate at which many public sector companies like the National Highway Authority of India and NTPC had issued masala bonds around the same time.

The allegations of a high interest rate build-up to the UDF's fundamental charge. The LDF government had kept the coupon rate high so that most firms would keep away and allow CDPQ, a Canadian company with stakes in the controversial SNC-Lavalin Company, to sweep up the bonds.

The issue had never settled down. On Wednesday, Finance Minister K N Balagopal sought to counter the UDF charge that the same amount of Rs 2,150 crore could have been mobilised just the way Kochi Metro had mobilised funds.

Balagopal said there was a difference between the loans taken for Kochi Metro and the funds KIIFB secured through masala bonds. Though the interest rate for the Kochi Metro Rail loans was just 1.55%, it was taken on Euro terms. The interest of these loans was subject to revision every six months based on exchange rate fluctuations, he said.

"And when the rupee undergoes devaluation, which is usually the case, forget the interest, the principal amount taken will also swell," Balagopal said.

"It is exchange rate fluctuations that hold back governments from resorting to loans on euro or dollar terms. For masala bonds, since it is done in rupee terms, there are no exchange rate fluctuations and the principal amount will always remain the same," Balagopal said.

This sounded convincing, till Opposition Leader V D Satheesan intervened. He said a dollar-based loan taken at an interest of 1.5% would be far cheaper than the masala bond even if there was normal rupee devaluation. "The dollar should appreciate at least six times for such a loan to be as costly as the masala bonds," Satheesan said. In that case, one dollar would be Rs 420, which Satheesan said was an impossibility.
Balagopal said this was misleading. The argument will go on, indefinitely.

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