`Low Rating To Hit New Issues'

The overall sovereign rating of India was acting as a barrier to domestic companies' attempts to raise funds through the capital markets for infrastructure projects, said J P Morgan vice-president Fa Au Yeung.

Saying that Indian infrastructure projects were at an "developmental stage", Yeung said that as a result of the rating downgrade, companies would be forced to pay higher coupon rates. He pointed that though infrastructure projects can access local financial markets in a cost effective way after section 10 23 (G) which allows extra tax breaks was added, it does not create "extra liquidity", which the US capital markets can lead to.

Compared to raising funds through the US capital markets, Yeung said that private equity worked out to be very expensive and also the investor base was narrow. The process of getting funds from bilateral and multilateral agencies was very cumbersome. Funds from export credit agencies, he argued, were often tied to equipment from the host country.

Against this, capital market issues have longer maturities and grace periods and back ended repayments, fewer conditionalities and no constant monitoring.

Pointing out the drawbacks of a capital market issue, he said the number of players was not very large, the rating agencies were very cautious, a carry cost was involved and the withholding tax of between 10-15 per cent would also have to be factored in. Besides, the promoters should also accept widening credit spreads. He also argued that regional disturbances have a huge effect on pricing of deals.

The main factors which ensured the success of raising funds through the capital markets include high tolerance of credit spreads, strong foreign exchange positions and a financial structure.

In 1998, he said that it was expected that the risk premium will be higher (though interest rates will be lower) and smaller allocations will be made for Asian markets. However, increased use of capital markets over bank funds was likely to remain the trend.