Covid-19 exposes hurdles of credit market as borrowers shun regulations

Efforts by Indian policy makers to open up rupee corporate bond sales to more investors took a step backward during the pandemic, as borrowers shunned tighter regulations in the public market in a record dash for funds.

Private bond placements, which restrict the number of investors in a deal, have long accounted for the vast majority of debt sales in India’s local-currency credit market, but they rose to 99% of all offerings this year, the most in at least a decade. A bigger public debt market should help reduce borrowing costs for issuers by increasing competition for deals, and boost liquidity by drawing in more participants to transactions.

“Companies didn’t have the luxury of time during the pandemic to go for public issuance of bonds, which can easily take a month, compared to less than a week for private placements,” said Madan Sabnavis, chief economist at Care Ratings. “Liquidity is not building up in India’s bond market as we lack a robust public issue market.”

Indian policy makers have put a priority on deepening the nation’s corporate bond market given the high level of bad loans at local banks, and the market regulator will allow investors to make online bids for publicly offered primary deals from 2021. In India, private placements are taken up mostly by insurers who prefer to hold the securities to maturity, reducing trading activity in the market.

A lack of a more open market where participants can actively trade can have severe consequences for credit investors, as witnessed early in the pandemic when Franklin Templeton froze over $4 billion of Indian debt funds, citing a drying up of liquidity in some market segments.

Publicly offered corporate bond sales may pick up next year with the urgency of fund-raising seen in 2020 receding, Care’s Sabnavis said. Rupee corporate bond sales, including privately and publicly offered notes, surged to a record of 8 trillion rupees ($108 billion) in 2020 after the central bank slashed rates to help companies hit by the pandemic raise funds cheaply.

The Securities and Exchange Board of India’s new digital option, set to come into effect in January, should also help issuance of publicly offered corporate notes. It allows investors to bid online for the first time for such securities.

“Imagine the convenience of participating in public issues of bonds with a few clicks as compared to doing paperwork today,” said Abhijit Roy, chief executive officer at GoldenPi Technologies, an online platform for retail investors to buy bonds. “You will see people invest in the public issues of bonds in volumes. This will also lead to the increase in depth in overall bond market and consequently liquidity.”