Interest On Blue Chip Ncds, Fixed Deposits Likely To Go Up
Interest rates on debentures and fixed deposits of blue chip companies will go up as and when Parliament approves the draft Companies Bill, financial circles said.
Rates on these instruments have been sliding following an overall decline in interest rates since the Reserve Bank announced the slack season credit policy. Rates of non-convertible debentures had dropped by 100 to 200 basis points. Interest rates on company fixed deposits has fallen by 50 to 100 basis points in recent weeks.
Blue chip companies are expected to take advantage of the buyback provision in the draft Companies Bill, once it is passed. If that happens, there will be a reversal in the current trend of falling interest rates in this segment of the market, financial experts said.
The draft bill allows companies to issue debt instruments to raise funds for the specific purpose of buying back their own shares from the market. It also suggests that the debt-equity ratio be kept at the level of 2:1 even after funds are mobilised for this purpose through the debt instruments.
The provision, if accepted, will result in an expansion of the NCD market which is already drawing a lot of attention from foreign financial investors and mutual funds keen on reducing their exposure to equity markets. Besides, the Reserve Bank decision to exempt investments in debt instruments from the 5 per cent investment limit of banks has also opened up a larger market for NCDs.
Many companies would like to raise funds to buy back their shares because they have already exhausted the reserves created out of share premiums in the past. Besides, the depressed prices of shares at present is an attraction in itself.
But most of them have already exhausted the debt-equity ratio limit of 2:1 by drawing heavily from banks and financial institutions.
There has been very little expansion in equity because of the depression in the capital markets.
The only exception are the blue chip companies who have not yet borrowed enough to reach a 2:1 debt-equity ratio. These companies have cash surplus which they have currently deployed in the inter-corporate deposit market, albeit a lower interest rates. Interest rates in the ICD market for corporate borrowers has fallen from 17-18 per cent to 14-15 per cent.
Since most blue chip companies have not launched new projects for the past year or so, their debt burden also is low. So they will raise funds through fixed deposits and debentures to buy back their shares at the currently depressed rates.
There is a limited amount of money available for investment in debt paper. If more blue chip companies come up with debt instruments to fund their buyback programmes as expected, interest rates in this segment is bound to rise.
This will mean a reversal of the current trend of falling interest rates on NCDs and fixed deposits, sources added.