Sebi norms for corporate bonds could boost issuances by Rs 500 bn: CRISIL

234 firms to drive incremental issuances of this amount over next five fiscals; move covers 444 companies, is aimed at reducing load on banking system, deepening liquidity in corp bond market

Market regulator Securities and Exchange Board of India’s (Sebi’s) new framework to push large listed companies towards the bond market could result in incremental corporate bond issuances worth Rs 500 billion over the next five years, says Crisil Rating.  

Under the new framework large corporates have to raise a fourth of their incremental borrowings for a year through corporate bonds. A large corporate is defined as one having outstanding borrowing of Rs 1 billion or more, a credit rating of ‘AA’ or higher and an intention to mobilise long-term funds. 

The move is aimed at reducing the burden on the banking system and deepen the liquidity in the corporate bond market.

The new rules will be applicable to 444 companies, says Crisil. The combined long-term borrowings of these companies stood at Rs 45 trillion in 2017-18. These companies accounted for about 35 per cent of the total credit outstanding of Rs 130 trillion as of last fiscal. 

Crisil says around 210 of these 444 companies have already been sourcing at least a quarter of their funding needs from the corporate bond market.

“So the remaining 234 would be the ones driving incremental issuances. At present, they hold only Rs trillion of rated, long-term debt,” said the rating agency in a release.

Crisil projects incremental issuance between Rs 400 billion and Rs 500 billion over the next five fiscals.

“Incremental issuances will also be a function of the private sector investment cycle and trends in the corporate bond and external commercial borrowings markets,” the release added.

The framework comes into effect from April 1, 2019. In the first two years of implementation – fiscals 2020 and 2021 – a ‘comply or explain’ approach will be applicable. Failure to comply beyond fiscal 2021 will invite a fine equivalent to 0.2 per cent of the shortfall in bond issuances.

Gurpreet Chhatwal, president, Crisil, “Sebi’s framework is a step in the right direction to deepen the corporate bond market and usher in a market-oriented, risk-based pricing culture.”

Had Sebi lowered the rating threshold, the corporate bond market would have got an even bigger push, says Crisil.

“The inclusion of ‘A’ category and unlisted corporates would have made 1,400 companies with total debt of Rs 15 trillion eligible. This would have not only materially increased the supply, but also improved the risk appetite and diversity of sectors in the domestic corporate bond market,” it says.

Currently, there is high concentration of ‘AA’ category papers and 70 per cent of the issuances are by companies from the financial sector.

“Going down the rating spectrum in terms of issuances is expected to be a gradual process because the market needs to absorb the incremental supply. And for that to happen, pensions and insurers will have to be empowered to invest in ‘A’ rating category bonds,” says Somasekhar Vemuri, senior director, Crisil Ratings.