Exchangeable bonds offer fund leeway

BUDGET & MONEY

The step comes in the backdrop of India Inc making large acquisitions overseas. Exchangeable bonds will help group holding companies provide funding support for such takeovers or other large investment needs. Holding companies will now be able to issue bonds, which could be converted into shares of subsidiaries, unlike in a convertible issue where bonds are converted into shares of the issuing company.  The impact

The measure will have far-reaching implications for the corporate debt market, which is currently quite illiquid and suffers from lack of demand from banks and institutions. The finance ministry, in association with the market regulator Sebi, will soon issue the final guidelines for issuing exchangeable bonds.

 The bonds will mostly help unlisted holding companies of major groups involved in mega financing activities such as development of infrastructure and overseas mergers and acquisitions. This is because these holding companies could issue bonds that could be converted into shares of their group companies after a fixed tenure.  Exchangeable bonds could be issued in the domestic market as well as to overseas investors. Thus, the move provides companies with another instrument for raising funds.  The corporate debt market is currently witnessing a lot of supply of bonds from banks, which are busy garnering funds to meet capital requirements. As the market is illiquid, most banks are entering into bilateral placements with provident funds and insurance companies.  Corporates are not opting for issuing bonds, as they are getting overseas funds at cheaper rates. Banks, on the other hand, are more keen on sanctioning funds in the form of loans rather than issuing bonds because in a rising interest rate scenario, these investments create depreciation in value.  The R H Patil Committee report had recommended a slew of measures to promote the debt market. In line with the recommendations, Sebi has already started a platform in exchanges for reporting of corporate debt deals and shortly the exchanges will also launch the trading platform.  Discussions have also started with various state governments for rationalisation of stamp duty on transactions.