Budget 2018: One-fourth of corporate fund raising should be through bonds

Yields shoot up as government misses fiscal target for 2017-18

In a major move that would finally make the corporate bond market deep and vibrant in the country, Union Finance Minister Arun Jaitley proposed that the corporate sector should now raise at least one-fourth of their funding requirement through bonds, while also reducing the regulatory minimum investment grade to ‘A’ from ‘AA’.

The FM also proposed in his Budget speech for 2018-19 that the RBI Act would be amended to accept uncollateralized deposits in liquidity operations, while setting the fiscal deficit target at 3.3 per cent for the next fiscal.

The fund raising requirement is not a rule yet, but the regulators would ‘nudge’ the companies to do so. It can be safely assumed that all companies will eventually walk the way.

However, this will be a major blow to commercial banks as credit growth numbers will be hit significantly. In the face of competition from the bond market, banks have already started to get their acts together in recent times and corporate sector CFOs say the lenders are now prompt in sanctioning and extending loans for companies not under stressed list of banks.

The size of the corporate bond market is now at more than Rs 4 trillion. But the market is dominated by firms with a rating of AA and above. Below AA grade, there are hardly any takers. Besides, insurance regulator and others mandate companies to invest only in AA rated and above papers. However, now that they can invest in A rated papers, coupled with Indian companies accessing the bond market for their funding requirement, the size of the bond market can easily double in a matter of one or two years.

The yields on the 10-year bonds meanwhile, have risen to 7.53 per cent, from Wednesday’s close of 7.43 per cent, partly because the fiscal deficit numbers slipped to 3.5 per cent of the GDP for the current fiscal, from 3.3 per cent budgeted, and also because the long term capital gain tax imposed on equity markets.

Experts say the long term capital gain tax will dampen the appetite of foreign investors, particularly as securities transaction tax (STT), at 15 per cent, continues to exist. If they go slow on investing in the equities segment, bond flow would likely be impacted too.

Besides, the FM said strong regional rural banks would be allowed to raise money from the market, which would push up supplies in the market. The market is already under pressure due to higher supply from the central government, as well as from states and any more high grade supplies would be worrying for the bond market.