People
&Markets
India promotes corporate bonds
India’s market regulator wants large
companies to meet at least a quarter of
their funding requirements in the bond
MARKETûFROMûTHEûNEXTûlSCALûYEAR
The proposal from the Securities and
Exchange Board of India, published on
July 20, would apply to companies with
outstanding long-term borrowings of Rs1bn
(US$14.6m) or above, a credit rating of AA
or above, and plans to borrow for more
than one year. The framework would
exclude commercial banks, and external
commercial borrowing and inter-corporate
borrowing between parent companies and
their subsidiaries would not count towards
the ratio.
Market participants say the proposals,
set out in a consultation paper, are a step
in the right direction at a time when banks
are reluctant – or unable – to lend given the
level of bad loans in India.
“The pressure on the banks will reduce
and the corporate bond market will deepen
FURTHER vûSAIDû+ILLOLû0ANDYA ûHEADûOFûlXEDû
income at Essel Finance AMC.
In India there has traditionally been a
high reliance on the banking system to
raise funds because the loan market has
tended to be cheaper and deeper. However,
“the push towards the bond market will
increase the volume of quality paper,
reduce the concentration on bank balance
sheets and instil credit discipline among
borrowers”, wrote Care Ratings in a note
dated July 23.
Implementing the proposal could be
tricky, so the market regulator is taking
gradual steps. “Sebi is only proposing
that good, rated corporates which have
easy access to the bond markets adhere
to the mandatory 25% limit,” said Rajeev2ADHAKRISHNAN ûHEADûOFûlXEDûINCOMEûATû3")û
Funds Management.
Sebi has proposed a compliance
mechanism that would be implemented in
phases to smooth the transition because
India is in a rising interest rate cycle
and issuers will warm to the idea only
gradually, said Radhakrishnan.
&ORûTHEûlRSTûTWOûYEARS ûCORPORATESûWOULDû
have an option to comply or give the
reason for their non-compliance as part of
disclosure requirements to stock exchanges.
From the third year, corporates would
be tested over a period of two years to see
if they are meeting the bond-borrowing
requirement. If a company does not
COMPLY ûAûlNEûOFûnûWOULDûBEûLEVIEDû
on the shortfall amount.
0REVIOUSLY ûALLûNON
lNANCIALûISSUERSû
were required to set aside a portion of
THEIRûPROlTSûTOûCOVERûûOFûTHEûVALUEûOFû
their outstanding bonds as a safeguard,
but the latest proposal dispenses with
that requirement, thanks in part to
the introduction of the Insolvency and
Bankruptcy Code in 2016.
“The IBC has addressed the default risk of
bonds to a large extent as the bondholders
have been kept on higher priority than
even government dues in the liquidation
waterfall,” said Sebi in the consultation
paper.
The share of corporate bonds as a
percentage of GDP increased dramatically
in Brazil, Russia, China and the UK in the
lVEûYEARSûFOLLOWINGûTHEûIMPLEMENTATIONû
of bankruptcy reforms in those countries,
Sebi wrote. The regulator estimated that
the share of bonds as a percentage of
GDP will increase from 17% currently to
22%–23% by 2022-23 for India due to thebankruptcy reform.
However, market participants say
creating demand for these bonds will be a
bigger challenge.ADDRESSING DEMAND
“It is all right to force good, rated issuers
to tap the bond markets, ensuring ample
supply, but the demand also has to
come,” said Radhakrishnan of SBI Funds
Management. “We also need to see more
enabling guidelines to facilitate more
demand from long-term investors as
well as incentives to promote increased
participation from retail investors.”
A DCM banker said the pension fund
and insurance regulators would have to
introduce regulations to allow purchases of
bonds that are rated below AAA.
The proportion of corporates borrowing
via bonds compared with bank lending has
INCREASEDûINûTHEûPASTûlVEûYEARSû(OWEVER û
bond issuance has been concentrated in the
AAA and AA categories – these two rating
brackets accounted for 89% of volume in
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sector companies dominating private
placements.
Sebi’s consultation paper is also in
line with the RBI’s move to limit banks’
exposure to major borrowers. Large
borrowers are barred from relying on banks
for more than 50% of their total funding
requirements and lenders exceeding that
limit have to set aside more provisions.
A borrower is considered large if it has
aggregate fund-based credit limits of over
Rs250bn in FY18, falling to Rs150bn in FY
and Rs100bn beginning FY20.
Sebi has invited public comments on the
proposals by August 13, and is expected
to come out with a draft circular before
ANNOUNCINGûTHEûlNALûRULES
KRISHNA MERCHANT