Tyagi says framework for 'on-tap' bonds to be issued soon

Sebi chairman Ajay Tyagi Wednesday said the regulator will soon issue the operational framework for 'on-tap' bond issuance by corporates.

According to Crisil, the overall supply of corporate bonds may more than double from Rs 27.4 trillion at the end of fiscal 2018 to Rs 55-60 trillion by the end of fiscal 2023, led by issuances from the financial sector, followed by infrastructure and other companies. Against this, it expects the demand to be about Rs 53 trillion.

"We are working on operationalising the 2018-19 budget announcement which mandates large corporates to raise 25 per cent of their financing needs from the bond market. Sebi would be shortly issuing the operational framework (for the same)," Tyagi said at an event in the city.

RBI has laid down the large exposure framework, aimed at limiting/capping banks' lending and their exposure to large corporate entities. This is expected to nudge large companies to tap corporate bond market for raising their debt, though the efficacy of the framework is yet to be tested, Tyagi pointed out.

He noted that a vibrant capital market, both equity and bond, has to play a pivotal role to facilitate fund mobilisation for sustaining India's projected economic growth momentum. The role of corporate bond market becomes even more important now, given the stress on the banking sector.

During the last five years', nominal GDP grew by over 67 per cent. Over the same time period, outstanding bank credit increased by 63 per cent, while outstanding corporate bonds increased by over 117 per cent, from Rs 12.6 trillion to Rs 27.4 trillion. Financing through equity, during the same period, was over Rs 6.2 trillion, he pointed out.

Fiscal 2016-17 can be marked as a defining year in this context, as funds raised from the corporate bond market touched an all-time high of Rs 6.7 trillion, surpassing the amount of bank credit.

In view of the larger complementary role that debt market have to play along-side bank credit for financing economic activities, several policy measures have been taken by the government and regulators to develop the corporate bond market, the chairman said.

Tyagi highlighted the role of credit rating agencies (CRAs) as important gatekeepers in maintaining the trust of debt investors. During the last one year, Sebi has taken a number of steps to rationalise the governing structure of CRAs and has emphasised on close monitoring of ratings. More needs to be done and we would consider bringing in required changes in consultation with stakeholders, he added.

"There is an opportunity for development of bond markets in the present NPA crisis. Of course, the volatility in bond yields in the last few months has roiled the markets thereby impacting the raising of bonds. However, in the medium to long term, there seems to be no other option but to shift from bank financing of projects to bond funding," Tyagi said.

The chaiman touched upon the issue of 'trust' and how this is affecting investors' confidence as a result of defaults by large entities.

He pointed out the inter-connectedness arising as a result of complex corporate subsidiary structures and how the maze of subsidiaries facilitate masking the end use of funds. "Proper monitoring of end use of funds, even at the last level of corporate structure, is important," he remarked.

Recently, Sebi has mandated that the statutory auditor of a listed entity shall undertake a limited review of the audit of all the entities whose accounts are to be consolidated with the listed entity. Similar provisions need to be made for unlisted holding companies, he said.