Anxiety on Bond Street

Sebi's diktat on debt market borrowing isn't enough

The Securities and Exchange Board of India (Sebi) has mandated that listed companies rated AA and above having an outstanding loan of at least Rs 100 crore must borrow 25 per cent of their incremental long-term funding need from the bond market. The regulation, which is aimed at increasing the depth of the market, comes into effect from April 1. The timing could have certainly been better as the bond markets have been nervous in the second half of the current financial year, beginning with the Infrastructure Leasing & Financial Services (IL&FS) defaults, the non-banking finance companies’ liquidity situation, and more recently, the Zee and Anil Ambani groups asking lenders to accept a standstill on promoters’ borrowing against shares. 

 Sebi’s regulations are in tune with the recommendations of a working group for the development of a corporate bond market. Many companies with high credit rating have already taken to the bond market to lower their borrowing costs. According to a Crisil analysis, of the 444 companies rated AA or higher, 210 have already been raising 25 per cent of their incremental borrowing through the corporate bond route. In all, Rs 40,000-50,000 crore of additional corporate bond issuances are likely over the next five years to comply with the Sebi rules. This would be raised by the remaining 234 companies. For domestic institutional investors too, this move is expected to provide adequate, good quality paper to buy.

It’s a given that India needs a thriving corporate bond market, but the government and the regulators should have ironed out some vexing issues before enforcing such a rule. First, companies may need more time to switch 25 per cent of their incremental borrowings to the bond market. Sebi, on its part, has provided companies flexibility in the first year to carry over the shortfall, if any, to the next year. But from the third year, the capital market regulator will charge a fine of 0.2 per cent of the shortfall in bond issues. This rule needs to be relaxed. The bond market is not as deep at present, with about 70 per cent of the fund-raising in recent years being done by non-banking finance companies. Moreover, it is only the top rated companies, which are able to raise funds easily in the market. For AA rated companies, both demand and costs are not as attractive. Raising bonds from the retail market is an option, but it comes at a higher cost both in terms of compliance and fund-raising expenses. Insurance and pension funds, which would be interested in longer tenure papers, need to be incentivised to invest in these papers. Another investor category — foreign portfolio investors — would want liquidity, which is missing as of now.

Also, if lenders were to add more AA companies in their bond portfolio, they would want credit rating agencies to be more proactive. The IL&FS debt rating is a recent memory where its papers went from top rated to junk in a matter of days, proving lack of oversight on rating agencies. Shifting a part of companies’ borrowings to the debt market is a good idea, but it should not be only the corporate sector’s responsibility — the government and regulators too have a role to play.