The masala story of the masala bond: Why exactly did Pinarayi Vijayan go to London Stock Exchange?

Why is the Canadian pension fund, which is associated with SNC-Lavlin, investing for a Kerala bond and what is Pinarayi’s interest?
The masala story of the masala bond: Why exactly did Pinarayi Vijayan go to London Stock Exchange?

On May 17, 2019, Pinarayi Vijayan became the first Chief Minister from India to have been invited for opening the trade in London Stock Exchange and he proudly tweeted, “It was a privilege to open the trading in London today. Kerala also became the first sub-sovereign entity in India to achieve such a feat”. “Kerala Infrastructure Investment Fund Board (KIIFB) strives to be at the forefront of creating a sustainable development model for infrastructure financing in the emerging markets and an exemplar for best practices in corporate governance and fund management," said KIIFB CEO KM Abraham, on the occasion. However, the facts, figures and documents accessed by nationwide seem to tell a different story.

Firstly, Masala bonds are nothing but another form of a debt instrument — the only difference being that these bonds are denominated in Indian rupees, but are issued outside India. Typically, a government or a corporate entity would go for masala bonds if it is cheaper or if there is any specific repayment or exchange rate related advantage associated with it. If there is no such advantage, settling for domestic borrowing is more sensible. So when there was no such advantage whatsoever, why did Kerala choose to go through this difficult route and get exposed to international borrowing at a high coupon rate of 9.723%? The answers are disturbing.

According to the minutes of KIIFB board meeting on Masala bonds, accessed by The NationWide, the Chief Secretary and Additional Chief Secretary (Finance) had both raised their concerns about overseas borrowing at such a high rate and about the attendant loss to the exchequer. Only Pinarayi Vijayan (Chief Minister and Chairman), Thomas Isaac (Finance Minister and Vice Chairman) KM Abraham (Chief Executive officer and Fund Manager) and the politically nominated members on the Board approved of floating a Masala bond. In hindsight, the arguments put forth in favour of the masala bonds have proved to be false and misleading.

The Kerala Infrastructure Investment Fund Board (KIIFB) made its debut listing on the London Stock Exchange targeting Rs 21.5 billion ($312 million equivalent) senior secured fixed-rate bond of five-year tenor with a 9.723% coupon. “This transaction has accomplished our objective of diversifying our sources of funding by accessing capital from international investors," KIIFB CEO Dr KM Abraham said at the launch at London. However, there were only 16 subscribers to the KIIFB Masala bond and the lion’s share was subscribed by Caisse de dépôt et placement du Québec (CDPQ, Canada). KIIFB has officially refused to divulge details of this holding.

The finance minister is officially on record in a TV interview that they were in negotiation with CDPQ even before listing of the bonds at London stock exchange. It is understood that the listing at London stock exchange itself was intended to facilitate CDPQ. In this curious case, the deal was already struck with CDPQ and then according to their convenience it was listed at London stock exchange. After the listing on May 17, 2019, CDPQ immediately subscribed en masse at already agreed rates. There is evidence of telephonic discussions with KIIFB officials and even visit of CDPQ representatives to Kerala, prior to the listing.

If raising funds was the only agenda of the government, the listing at the London stock exchange or the masala bond itself provided no significant advantage. A similar domestic bond could have been floated in Bombay Stock Exchange as well, and probably at a cheaper rate. The rate of interest would probably have been not more than 7.5 to 8% which is the usual rate of borrowing for other state government guaranteed bonds.

In the KIIFB board meeting, the chief secretary and the finance secretary had clearly opposed the proposal for masala bonds. Before the Pinarayi government amended the KIIFB Act in 2016, the chief secretary was the chairman and the finance secretary was the fund manager of KIIFB. Having been reduced to mere members of the board now, they could only silently witness the new chairman and team push through their own agenda.

So what is the great thing achieved by listing the masala bond at London?

KIIFB’s masala bond was an unknown commodity with very poor ratings (BB-/B) and it was sure that none other than CDPQ would subscribe to it in a big way in London. On the other hand, if it were listed in India many domestic pension funds would have subscribed to it and CDPQ would not get the lion’s share. Further, it would have raised eyebrows immediately for other reasons. The CDPQ - SNC-Lavlin connection is notorious in Canada and the recent scam resulted in the resignation of Gerald Butts, the Principal Secretary to Justin Trudeau. The Pinarayi Vijayan-SNA-Lavlin link is even more notorious in Kerala and the multi crore scam is now pending before the Supreme Court. CDPQ holds 19.9 per cent of Lavalin's shares.

The listing at London stock exchange also makes it subject to English law and the procedural details are not available in any official records in India. It helps CDPQ to maintain secrecy about its fund flow and to keep all transactions out of legal arms-length of Indian investigative agencies. It is another curious coincidence that the Indian Embassy’s help or assistance was not sought in the whole listing process.

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Most of the listing related transactions in London were officially facilitated by an agent, DLA Piper — represented by the firm partner Joywin Mathew, an NRI from Kerala — whose selection and engagement criteria is not known. The mobilisation commission that the agent would be paid and the payment to the two private banks — Axis Bank and Standard & Chartered Bank — for acting as dealers, the payment for Hongkong and Hongkong and Shanghai Banking Corporation Limited (HSBC), another private Bank that is the Trustee and agent — none of these are divulged by the CEO of KIIFB or the Finance Minister despite repeated queries. These are black holes that were made possible by taking the London route. The deputy managing director of KIIFB, Sanjeev Kaushik had earlier worked as head of debt capital market under the HSBC management. As per audited accounts of KIIFB 2019-20, total masala bond raising expenses is 24.73 crores.

Axis bank happens to be under investigation for violations in foreign exchange transaction in the Swapna-Sivasankar gold smuggling case and LIFE project scam. A locker facility was allegedly used by Swapna Suresh and Venugopal, the Chartered Accountant of Sivasankar, to keep the proceeds of crime. Customs and the national investigating agency have both affirmed this before the respective courts. It cannot be just another coincidence that this very same Mr Venugopal happens to be the personal auditor of KM Abraham, CEO KIIFB and has also been engaged as the peer auditor for KIIFB through Suri & Co. There is also evidence of Venugopal being engaged as a consultant with KIIFB much before he was appointed as a peer auditor and soon after the Pinarayi-KM Abraham team took over.

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Conflict of interests galore

We have an interesting scenario at hand. Despite having opportunities of availing domestic funding at a cheaper rate and in a less tedious manner, the Pinarayi government decided to take the difficult route at a higher cost to the exchequer and get exposed to exchange rate risk as well. It is not clear what motivated CDPQ, a pension fund in Canada to invest in this state sponsored bond that is junk rated by international standards. And why is that no other major pension fund or anyone for that matter subscribed to the KIIFB Masala bonds?

The unusual interest displayed by CDPQ indicates a dedicated subscription based fund where the subscribers of these bonds are Indians, particularly Keralites. In other words it is similar to Keralites putting their money in Kerala treasury. The bond holder's register is not available to public scrutiny and it throws up the possibility of any slush money parked abroad to be brought in legally. This money can be sent back to Canada in much the same way by selling it back to an accomplice in Canada. Since it is listed, no one can allege it as a hawala transaction and through a channel of fake entities this could be done easily. It is a cob-web of sorts leaving not even a trail in enquiry to prove collusion.

For politicians, this is much better than holding land or other investments which are getting risky due to increased transparency. But in bonds that are traded in stock exchanges, in case of a trail is initaited it can be transferred and submerged. Canada has strict privacy laws and no investigative journalist can reach out to any one’s private investments and is fast becoming a safe haven for slush money. The above possibilities of misuse and the strange things associated with this Masala bond makes the allegations raised by the opposition and the observations made by the Comptroller and Auditor General (CAG) alarming.

At the end of the day the only thing that the finance minister categorically admits as a tangible benefit of floating the masala bonds is “international visibility”. It is common sense that no government will spend so much money and put itself at a financial disadvantage merely for international visibility or publicity. So the question bounces back: why exactly did Pinarayi Vijayan go to London stock exchange?

The NationWide