To deepen the corporate bonds market, the Securities and Exchange Board of India on Friday came out with a proposal that will require large corporates to raise 25 per cent borrowings through this route from next financial year.
The framework is proposed to be implemented from April 1 next year and the large corporates identified as on March 31, 2019 will have to garner at least 25 per cent of their borrowings made in 2019-20 through bond market, Sebi said in a consultation paper.
This is part of an effort to reduce reliance on banks for financing corporates and simultaneously developing a liquid and vibrant corporate bond market.
Given the current stage of development of bond market in the country, Sebi said that any mandatory requirement would need to be ‘light-touch’ in nature and would also need to provide enough leeway to the identified corporates to meet the mandatory requirement from the bond market.
The suggestion comes after a proposal was made in Budget for 2018-19 that Sebi will consider mandating, beginning with large corporates, meeting about one-fourth of the companies' financing needs from the bond market.
Defining large corporates, Sebi said such firms need to have an outstanding long term borrowing of at least Rs 1 billion; a credit rating of “AA and above” and target to finance themselves with long-term borrowings (above 1 year).
Subsequent to implementation of budget announcement and after making an assessment of the capacity of the bond market to absorb even lower rated issues, Sebi may decide on reducing the threshold of rating framework from “AA” to “A”.
Issuing the draft paper, Sebi said that a “comply or explain” approach would be applicable for the initial two years of implementation. It means, in case of non-fulfilment of the requirement of market borrowing, reasons for the same will have to be disclosed as part of the “continuous disclosure requirements”.
“From third year of implementation, 2021-22 the requirement of bond borrowings shall be tested for a contiguous block of two years 2021-22 and 2022-23 will be treated as one block and the requirement of 25 per cent borrowing through bond market shall need to be complied for the sum of incremental borrowings made across the period of the block,” the regulator noted.
Further, at the end of block, if there is any deficiency in the requisite bond borrowing, a monetary penalty in the range of 0.2 per cent to 0.3 per cent of the shortfall will be levied, it added.
The Sebi has sought comments from public till August 13 on the proposal and a final framework would be put in place after taking views of the stakeholders.
According to Sebi, the regulatory intent would be to operationalise the budget announcement in a manner which provides for a 'light touch' framework and at the same time provides an appropriate timeframe to the market for smooth transition to the new guidelines.
Sebi noted that a series of steps have been taken, over time, by the government in consultation with regulators, to develop and deepen the bond market.
At the same time, however, concerns have been raised about the ability of banks to finance increasing borrowing needs of the corporates, especially as the investment cycle has shown an upward tick.