Bank of India Plans to Raise ₹5000 Crore via Infrastructure Bonds

Sub : Eco

Sec: Monetary Policy

Bond Issuance Details:
- Bank of India (BoI) will issue 10-year infrastructure bonds next week.
- The issuance includes a base size of ₹2,000 crore and a greenshoe option of ₹3,000 crore, totaling ₹5,000 crore.
Purpose of Bonds:
- Infrastructure bonds are used to fund long-term infrastructure projects.
- These bonds have a minimum tenor of seven years and provide banks with funding exempt from regulatory requirements like Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).
Bank’s Fundraising Plans:
- BoI’s board approved raising ₹10,000 crore through long-term infra bonds in FY 2024-25.
- In July, BoI raised ₹5,000 crore through 10-year infra bonds at a 7.54% coupon rate.

Regulatory Advantages of Infra Bonds:

No CRR/SLR Requirements: Funds raised through infra bonds can be fully utilized for income-generating activities, unlike Certificates of Deposit (CDs) and retail deposits.
More economical for banks compared to deposits due to regulatory exemptions.

Demand Drivers for Infrastructure Bonds:

Government Spending:
- Increased spending on infrastructure development has fueled demand for funds.
Key Sectors of Investment:
- Sectors such as steel, roads, and renewable energy are major drivers of fund requirements.

Greenshoe Option:

Definition: A Greenshoe option is an over-allotment option that allows underwriters to sell additional shares (usually up to 15%) in an initial public offering (IPO) if demand exceeds expectations.
How it works: The company issuing shares authorizes underwriters to sell extra shares and this stabilizes stock prices by meeting excess demand.
Purpose: To maintain market stability and reduce volatility during the listing phase.
Example: If 100 million shares are issued with a 15% Greenshoe option, underwriters can sell an additional 15 million shares if demand is high.

Coupon Rate:

Definition: The coupon rate is the annual interest rate paid by a bond issuer to the bondholder, expressed as a percentage of the bond’s face value.
How it works: If a bond has a face value of ₹1,000 and a coupon rate of 5%, the bondholder will receive ₹50 annually as interest.
Example: A bond with a face value of ₹10,000 and a coupon rate of 8% pays ₹800 annually.
Importance: Helps investors evaluate the return on bonds compared to other investment options.

Certificates of Deposit (CDs):

Definition: CDs are short-term, negotiable money market instruments issued by banks and financial institutions to raise funds.
Features:
- Issued at a discount to face value, with tenure ranging from 7 days to 1 year.
- Bearer instruments that are transferable by endorsement.
- Typically carry higher interest rates than savings accounts due to the fixed tenure.