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 India's first additional Tier I perpetual bond issuance after recent rule changes to make them more appealing was sold at a lower-than-expected coupon, indicating a revival in demand for such papers, four merchant bankers said on Tuesday.

Canara Bank sold perpetual bonds with a call option at the end of 10 years at a coupon of 8.27% compared to expectations of 8.30%-8.34%.

KEY CONTEXT

Additional Tier I perpetual bonds have no pre-defined maturity date and mature when an issuing bank exercises the call option.

Funding through such paper had dropped to 175 billion rupees in fiscal 2024 from 344 billion rupees the previous year.

To drum up interest, the Securities and Exchange Board of India (SEBI) recently allowed mutual funds to value these papers as per call option, instead of 100-year papers.

WHY IT'S IMPORTANT

Funding via this route opens up another option for banks to raise capital, especially as they struggle to raise deposits.

This was the first such debt issue from any lender this financial year and paves the way for others, with State Bank of India among at least three set to sell such debt soon.

BY THE NUMBERS

Canara Bank's perpetual bond issue received bids worth 46.58 billion rupees ($555.24 million), which is over 4.5 times its base size of 10 billion rupees.

KEY QUOTES

"There was a good response from investors in Canara Bank issue, as the full amount was raised and at a reasonably tight rate of 8.27%. This indicates that there is decent investor demand for mid-sized issues of AA+ rated perpetual bonds from AAA-rated issuers," said Shameek Ray, head of debt capital markets at ICICI Securities Primary Dealership.

"There was participation from some mutual funds along with insurers, and Canara Bank also had the early mover advantage which worked in its favour," a senior merchant banker said requesting anonymity as he is not authorised to speak to media. ($1 = 83.8920 Indian rupees)