Anyone hoping for a controversial call here to India′s new Prime Minister to switch religion is going to be sorely disappointed. However, albeit potentially not as spicy I′ll admit, there′s plenty going on in the Indian finance and investment arena at the moment to focus on and be excited about.With the Sensex crossing the 25,000 mark for the first time ever, there′s certainly a great deal of positivity out there as a result of the change of government. Investors are hoping that the new regime will deliver on both economic and market reforms much needed to re-invigorate the country′s flagging growth rate. Indeed, India stands on the verge of a new era and it is imperative that the new government be on point with its financial strategy.As Narendra Modi (a.k.a NaMo) settles in to his new job and gets his feet under his desk, one of the primary issues on his agenda will be public funding. No doubt the exiting party will, in true time honoured fashion, barely leave two brass farthings (or perhaps more aptly, two paise) in the coffers to rub together. Mr Modi will need to create some liquidity. Pronto.Mr Modi's options Higher taxation We all know the tax system is very effective in India (ahem!). Reportedly, only 2-3 per cent of Indians actually pay any tax at all. So a bit of a hill to climb there, I think.His second (and probably more realistic) option is to raise money. He can either sell bonds to the public via the central bank or he can sell assets to investors. I believe that the new PM should consider selling partial stakes in PSUs (Public Sector Undertakings). PSUs are companies in which the government has a 51 per cent or greater equity stake. Now, he could either sell the equity outright but I believe that by using Convertible/ Exchangeable Bonds, the government can: a) sell these stakes at a premium to current market value; b) issue bonds at lower interest rates to domestic Indian lending charges; and c) retain the full size of their stakes until/if the bonds are converted.So, what is an Exchangeable Bond An exchangeable bond or simply “exchangeable” is a type of convertible bond. In a regular, plain vanilla convertible issue the borrower issues debt that is convertible into the company's own shares. By embedding an equity option in the bond, issuers can access cheaper financing than would otherwise be available via straight bond issuance. Where an “exchangeable” differs from the norm is that the issuer and the underlying company are different. This has been a popular structure with foreign multi-nationals (especially with Germans historically, who have used exchangeables to divest cross holdings in other group or non-group companies). Foreign governments have also used exchangeables to raise money by divesting their holdings in the public sector.On the flip side of the coin, investors favour the structure as the credit risk on the issuer is bifurcated from the risk on the underlying stock. That is, the underlying stock may perform poorly but as long as the issuer's credit remains solid, bondholders will be comfortable with regard to retrieving their initial investment.Exchangeables - the International Experience
