Sumitomo Mitsui Financial Group (SMFG) based in Tokyo recently extended a substantial credit of INR 6 billion on January 10, 2024, to its India-based subsidiary, SMFG India. This significant financial infusion took the form of a Perpetual Debt Instrument (PDI) through the External Commercial Route.
Notably, this marks the pioneering issuance of a Perpetual Debt Instrument by SMFG India Credit. The strategic move serves to fortify SMFG India Credit’s asset-liability profile, concurrently reinforcing its Tier-I capital base.
Established in 2007, SMFG India plays a pivotal role in financing various sectors, including SMEs for working capital and growth, loans for commercial vehicles and two-wheelers, home improvement loans, and more. The company, formerly known as Fullerton India Credit Company Limited, underwent a transformation in July 2021 when SMFG acquired a 74.9% stake.
The recently introduced perpetual bond, or perp bond, represents a unique financial instrument with no maturity date and an irrevocable fixed income. This perpetual nature allows for regular interest income without the obligation of redemption. Viewed as a source of perpetual income similar to dividends from equity shares, perpetual bonds are often regarded as part of the equity market.
In the case of SMFG India’s Perpetual Debt Instrument, this financial maneuver aligns with the principles of External Commercial Borrowings (ECBs). These commercial loans, governed by the Foreign Exchange Management Act (FEMA) Notification No. 3R & 8, are instrumental in enabling eligible resident entities to raise funds from recognized non-resident entities.
“With this issuance, the capital adequacy ratio improves by ~160 bps. Since these bonds are perpetual, the issuance also strengthens asset liability profile,” says Mr. Pankaj Malik, CFO, SMFG India Credit.
By opting for a Perpetual Debt Instrument via the External Commercial Route, SMFG India strategically positions itself for long-term financial stability, ensuring a continuous stream of income without the constraints of traditional maturity obligations.
