FY22 private placements growth may have hit record low, shows data

Lower appetite from borrowers in post-pandemic economy a key reason, say experts

The financial year 2021-22 (FY22) may end with the sharpest year-on-year drop in private placements seen on record.

The total amount raised is Rs 5.5 trillion as of March 25th according to tracker Prime Database. This would mark a 27 per cent decline over FY21’s Rs 7.5 trillion. This would be the sharpest year-on-year decline since comparable records are available dating back to FY01.  

Companies are going slow on expansions after the Covid-19 pandemic and there has been a general trend where they have been looking to now reduce debt, according to those tracking the situation. Private placements are a popular form of raising debt where securities are issued to a limited number of entities.  

Companies had raised significant amount of money when liquidity was high on account of regulatory measures in the initial phase of Covid-19 in 2020-21 said Pranav Haldea, managing director at Prime Database. He said that companies see limited avenues for deployment, reducing the need for additional borrowing at a time when debt has become costlier.

The sharpest decline previously was in 2013-14 (see chart 1). Private placements had fallen 18.4 per cent in a financial year marked by the ‘taper tantrum,’ when the threat of tighter global liquidity conditions affected India’s economic outlook.

“It is more to do with market conditions,” said Dwijendra Srivastava, chief investment officer –debt at Sundaram Asset Management Company. There has been limited movement on capital expenditure (capex), he pointed out with the credit pick-up being more driven by retail rather than corporate borrowers he said. Companies are reducing their existing debt rather than take on additional loans.

Most companies are not able to fully use their existing production capacity. This leaves them little incentive to borrow and invest in new factories for creating additional capacity. Only around 68.3 per cent of the manufacturing sector’s capacity is being put to use, according to the Reserve Bank of India’s Order Books, Inventories and Capacity Utilisation Survey (OBICUS) for the three months ending September 2021.

The current year’s decline comes after a year when private placements had seen their share in total fund-raising go up. Gross private placements by non-financial entities in total flow of resources to commercial sector was at a multi-year high of 16.9 per cent in FY21, shows RBI data. This may have been driven by lower overall resource mobilization by the commercial sector. Total resource mobilization was down around 28 per cent in FY21 compared to FY19.

Growth in total non-food credit, a measure of how much banks are lending, has been tepid for two years in a row.

Tighter disclosures around risk in debt mutual funds may have also made some asset managers more cautious in investing in private placements, according to a person familiar with the matter. Mutual funds are a large buyer of debt issued through private placements.

“…any change in the positioning of the scheme into a cell resulting in a risk (in terms of credit risk or duration risk) which is higher than the maximum risk specified ….shall  be  considered  as  a  fundamental  attribute  change  of  the scheme…,” said the Securities and Exchange Board of India circular made effective from December 1, 2021.

Mutual funds are required to inform their investors of any changes.

The new financial year (FY23) could be a year of relative normalization, according to Sundaram’s Srivastava, which could have an effect on private placements too.

“It will pick up this year…but not dramatically,” he said.