A unit of Infrastructure Leasing & Financial Services Ltd (IL&FS) has mandated three banks for a renminbi-denominated bonds offering, two sources said, marking the first Indian company to tap the offshore Chinese currency market.

The company has mandated Deutsche Bank, RBS and UBS for the deal and is looking to raise up to $200 million equivalent, the sources with knowledge of the deal said on Tuesday.

IL&FS, which finances and develops infrastructure projects , declined to comment on the deal.

Borrowers usually raise loans for between 1 and 5 years in the offshore yuan or "CNH" market, one of the sources said.

An increasing number of foreign companies such as Fonterra Co-Operative Group, New Zealand's biggest company, and Mcdonald's Corp are raising funds in the growing offshore yuan market.

Widely recognised borrowers, including the World Bank, Volkswagen and Caterpillar, have also sold yuan-denominated bonds or "dim sums" as they are more colorfully known after a local delicacy.

Many foreign corporate borrowers have been eager to tap the CNH market for funds for their Chinese operations, rather than borrow in the more expensive dollar markets.

Most of the growth in the CNH market has been because of a near-consensus market view the yuan will rise even as the fortunes of the dollar and the euro ebb.

Because holding an appreciating currency is considered a sound investment, bond issuers have been able to get away with paying record low coupons on their debt.

In June, IL&FS had held investor meetings in Singapore and Hong Kong.

Steep increases in domestic interest rates are driving Indian companies to cheaper offshore bond markets.

However, the lack of depth in the domestic swap market could prove a handicap for companies to exchange offshore yuan back to U.S. dollars.

Beijing's desire to wean its companies from relying only on the dollar to settle trade led to the growth of the CNH market, an experimental capital market that has seen explosive growth over the past year.

Last week, the Hong Kong Monetary Authority tweaked market regulations by allowing banks participating in offshore yuan business to consolidate their positions by including their trades in the foreign exchange market.

Since landmark reforms in July last year allowed banks in Hong Kong to freely trade renminbi, trade settled in China's currency has grown by six times.

Yuan-settled trade accounted for 7 per cent of China's total trade in the March quarter compared to less than 1 percent in the prior year.

As yuan-denominated trade volumes have grown, yuan deposits in Hong Kong's banks have exploded to more than half a trillion yuan ($85 billion) from less than 70 billion yuan in January 2010.

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