Diaspora Bonds Track Record and Potential

Diaspora BondsTrack Record and Potential Suhas Ketkar Vanderbilt University & Dilip Ratha The World Bank Migration and Development Conference World Bank, Washington DC May 23, 2007

Main messages • Israel and India have raised $35-40 billion financing • . . . Often in times of crisis • . . . Often at a discount • There is scope for other countries with large diaspora abroad to issue diaspora bonds for financing development

Diaspora Bonds: Introduction • Definition: Bonds issued by a country to its own Diaspora to tap into their assets in the adopted developed countries • Examples: State of Israel bonds, RIBs and IMDs from India, also bonds issued by Lebanon and Sri Lanka • Distinct from FCDs but similar to Islamic bonds placed in int’l capital markets

Diaspora Bonds: Agenda • Rationale: why would countries issue and investors buy Diaspora bonds? • Israeli and Indian track-record: significant differences and regulatory issues • Minimum conditions for the issuance of Diaspora bonds and potential issuers

Attraction for issuing countries • Patriotic discount: why not seek charity? • Stable source of finance, esp. in bad times • Support to sovereign credit rating Israel: S&P believes such support to be important but not decisive. Moody’s believes that it is more relevant now that the economic house has been put in order India: Did not prevent downgrading in 1998

Attraction for investors • Patriotism • Risk management – Diaspora investors are likely to view the risk of receiving debt service in local currency with much less trepidation • Desire to do “good” in the country of origin

Diaspora Bonds: Israeli experience • DCI established in 1951 to raise funds from Jewish Diaspora • Since then, Israel has raised over $25 bn via this stable source of finance • ..receiving significant patriotic discount – 4% coupon until 1990 regardless of US interest rates • Patriotic discount has declined of late as Jewish Diaspora with less direct links to the Holocaust is making investment decisions based on total returns

Israel: Diaspora Bond Sales

Israel: Bond Sales by Type Notes Fixed rate Floating rate

Discount on Israel Bonds US 10-yr treasury rate Israel DCI fixed rate bonds

Diaspora Bonds: Indian experience Issued by SBI with 5-y bullet maturity & minimum $2000 -- India Development Bonds (1991) $1.6 bn -- Resurgent India Bonds (1998) $4.2 bn -- India Millennium Deposits (2000) $5.5 bn -- Investors received 7.75% on RIBs vs. 7.2% on BB U.S. corporate bonds -- Investors received 8.5% on IMDs vs. 8.9% on BB U.S. Corporate bonds

Diaspora Bonds: Indian experience SBI limited sales to investors of Indian origin. Why? -- Marketing gimmick -- Indian Diaspora to show greater forbearance -- SBI reason KYC

Diaspora Bonds: Indian experience • SBI decided to forego SEC registration on the ground that RIBs/IMDs were bank CDs and hence were subject to U.S. banking rather than securities laws • RIBs were sold to U.S. retail investors • IMDs were not sold in the U.S. despite the word deposit in the name

Diaspora Bonds: Indian experience Deterrents to SEC registration include: -- High costs (but $500K not material) -- Stringent disclosure requirements (but no problem for SBI) -- Long lead time of up to 3 months -- Plaintiff-friendly U.S. court system -- India rejected U.S. courts as well as U.S. laws

Diaspora Bonds: Indian experience • “In addition to class action mechanisms to aggregate individual claims not prevalent in other countries, U.S. procedures – including rules of discovery, pleading requirements, contingent fees, and the absence of ‘loser pays’ cost rule – are far more favorable to plaintiffs than those of foreign courts.” Roberta Romano (1998)

Diaspora Bonds: Indian experience • While SEC registration is not optional, the Indian case raises an interesting issue of giving investors the choice of law and forum • Make such choice another attribute of the security to be priced in the market • Can be supported on efficiency grounds • Unlikely in short run given Enron, MCI etc. • But market pressure will come into play

Diaspora Bonds: Israel vs. India

Diaspora Bonds: Potential Minimum conditions for issuing diaspora bonds: -- Absence of civil strife -- Minimum governability -- Ability to meet SEC registration requirements -- Sizable first generation diaspora

Diaspora Bonds: Potential Source: Ratha and Shaw, 2007, South-South Migration and Remittances

Diaspora Bonds: Potential

Conclusions • Diaspora bonds have been used by Israel& India with success • A number of other countries are potential candidates for issuing diaspora bonds • SEC registration required in the short run

Diaspora Bonds Track Record and Potential