Companies with outstanding long-term borrowings of Rs 100 crore and a credit rating of “AA and above” will have to compulsorily raise 25% of their debt from the bond market from the next financial year, the market regulator proposed on Friday.
Finance minister Arun Jaitley had announced in the FY19 budget that large corporates will have to meet one-fourth of their financing needs through debt instruments as part of efforts aimed at broadening and deepening Indias bond market, which is dominated by government paper. A developed debt market is required to take on the critical burden of long-term funding for infrastructure projects, with banks that provided such credit having wound up with massive bad debt.
“The move is a big push to the corporate bondmarket, but the demand side too needs to be addressed,” said Ajay Manglunia, executive vice president, fixed income, Edelweiss Finance.
The Securities and Exchange Board of India (Sebi) said the framework would be applicable to all corporate, except scheduled commercial banks, that on March 31 of any year intends to finance itself with long-term borrowings. The idea is to make the debt market accessible even to lower-rated companies.
“Subsequent to implementation of the budget announcement and after making an assessment of the capacity of the bond market to absorb even lower-rated issues, a view would be taken on reducing the threshold of rating in the extant framework from AA to A,” Sebi said in a discussion paper seeking public comments by August 13.
The measure is relevant amid the bank debt-resolution process thats underway.
“Discussions with market participants and analysis of data reveals that the incremental shifting of corporate borrowing to bond market, on a yearly basis, would be in the range of 5 to 10 % of the total bond issuances during a year,” Sebi said. “It is expected that this requirement may not be onerous on the corporates, given that implementation of IBC (Insolvency and Bankruptcy Code) could result in further deepening of bond market by at least 5% of GDP.”
The regulator said the proposed dispensation of the DRR (debenture redemption reserve) requirement would give an additional fillip to this initiative. The DRR has been created to take care of repayments of bond investors.
“Companies will be eager to tap the bond market in the absence of adequate bank loans. For that they have to woo investors like mutual funds or insurers with additional securities like structured obligations, a kind of guarantee,” Manglunia said. “You need to relax norms initially for more investor participation and then wind it up with the market gaining maturity.”
Sebi has proposed that for the initial two years it will adopt a “comply and explain” approach. In case the market-borrowing requirement isnt met, companies will have to disclose the reasons for this to the stock exchanges.
“This will definitely boost the bond market, which could be pivotal for the country's long-term infrastructure financing needs,” said Ashish Agarwal, executive
director, AK Capital. “However, some other procedural and regulatory impediments such as debenture redemption reserve requirements will need to be addressed to optimise borrowing costs and create borrowers inclination toward the bond market.”
The share of the bond market in relation to bank financing has seen steady growth with the former overtaking the latter in FY17. About 90% of issuances take place in the credit-rating bucket of AA and above because institutional investors invest primarily in highly rated paper.