Rbi Moots Ban On Private Placement Of Debt

The Reserve Bank of India (RBI) has suggested the imposition of a temporary ban on private placement of debt issues in order to revive the depressed capital markets. The central bank has strongly recommended that corporates should instead be asked to raise funds through private placement of equity.

The suggestion is one of the recommendations submitted recently to the finance ministry by the RBI. A seven-member group, headed by chief economic advisor Shankar Acharya, will consider these recommendations at a meeting slated for February 18.

The RBIs recommendations are based on a detailed study conducted by the bank recently, which shows that private placement of debt has shot up since 1992-93. The total amount raised through private placement has leapt to nearly Rs 15,000 crore in 1996-97 from Rs 1,600 crore in 1992-93.

 

The RBI is of the view that if more corporates raise funds through private placement of equity issues, the average debt-equity ratio of Indian corporates would improve from the existing level of 1.22. Internationally, a ratio of 1:1 is considered theoretically desirable, though marginal fluctuations are accepted.

According to sources, the debt-equity ratios of Indian corporates will have to fall in line with those of global players, following the onset of globalisation.

The tendency to raise funds through private placements has increased because of the poor state of the primary and secondary markets. Therefore, the central bank has recommended that the Securities and Exchange Board should impose a temporary ban on the private placement of debt, which could apply till the secondary markets revive, according to a source.

Sebi sources said the RBI has been toying with the idea for some time. The ban could be imposed if required, a source said. The market regulator is however, sceptical, whether a temporary ban would help revive the markets. It would not be right to close one route for corporates and force them to opt for another, the source added.

According to finance ministry sources, These are short-term measures which the RBI has suggested for the revival of the capital market. In the long run, the RBI believes that the capital market will only improve provided the real sector of the economy improves.

The RBI has been arguing for regulation of private placement of debt for some time. In its annual report this year, the RBI had stated that the healthy development of the private placement market calls for regulatory norms and standards, specially because it is a highly informal market.

The existing debt-equity ratios across all corporates is estimated at 1.22:1 by the Centre For Monitoring Indian Economy (CMIE).

The RBI concerns on the high debt-equity ratio stems from the fact that during fiscal 1996-97, the ratio of equity to debt in total public issues was nearly 1:1.36. If all the private placements (mostly debt issues) between April 1996 and March 1997 are taken into account, this ratio rises even further to 1:3.25.

While the total equity raised by Indian corporates during April-December 1997 stands at Rs 1,465 crore, funds raised through debt instruments were close to Rs 1,460 crore. However, during the same period, the total amount raised through private placement shot up to nearly Rs 14,300 crore.

The RBI claims that there is no dearth of funds, as many good issues which have hit the primary market in recent years have received an excellent response. The controversial issue of banning corporates from charging high premia for public offerings has also been discussed in the report.

The RBI has argued that high premia have scared off investors, which, in turn, has caused corporates to turn away from the markets.