TREND:No beeline even 6 mos after SEBI rule on mandatory bond borrow

Friday, Sep 20, 2019


By Bhakti Tambe, Sanjana Raina and Alekh Archana


MUMBAI – The need to deepen the corporate bond market has found mention in five of the last six Union Budget speeches. Last year, the government finally bit the bullet and made it must for large corporate to raise a quarter of their borrowings through bonds.


The rule, notified by the Securities and Exchange Board of India for companies rated AA and above with outstanding long-term borrowing of at least 1 bln rupees, became effective from Apr 1 this year. It even prescribed a fine for bond issue less than mandated.


However, the capital market regulator's timing could not have been worse.


Just a few months before the notification, the Indian non-bank finance sector was hit by defaults by one of the biggest players in the sector–Infrastructure Leasing & Financial Service. The broader bond market, too, felt the ripples with risk aversion setting in.  


Not surprisingly, even after nearly six months of the SEBI norms taking effect, the corporate bond market has remained shallow.


Though SEBI's Apr-Aug data may show otherwise–bonds to the tune of 2.5 trln rupees were raised through private placement compared with 1.7 trln rupees a year ago–scanning the list shows it is skewed due to big-ticket issuances by usual suspects such as Power Finance Corp, REC, National Bank for Agriculture and Rural Development, Housing and Urban Development Corp, and National Highways Authority of India.


The data also has a base effect issue as in the first half of 2018-19 (Apr-Mar), companies, including the regular issuers, had cut down on issuances as they were adjusting to the newly-introduced electronic bidding platform.


"Post IL&FS, and Dewan Housing (Finance Corp) defaults, market is cautious to take exposure to new names. Higher rate is no longer driving demand," said a bond dealer with a fund house.


According to figures given by Prime Database–slightly different from the SEBI's data–corporate bonds aggregating 2.03 trln rupees were issued in the first five months of the current financial year. Of these, only 132 bln rupees were raise by new issuers, a far cry from expectation of 500 bln rupees of new issuances the SEBI's rule should have brought.


"About Rs 40,000-50,000 crore (400-500 bln rupees) of additional corporate bond issuances are likely over the next five years following the Securities and Exchange Board of India's move to shift a quarter of the incremental annual – and long-term – borrowings by large companies away from banks," CRISIL had said last year.


According to CRISIL's analysis, at least 234 new companies would have had to issue corporate bonds due to SEBI's rule.


But then India's economy has also slowed down considerably since then–Apr-Jun GDP growth hit 25-quarter low of 5.0%–stalling capital expenditure plans and, thereby, the need to borrow.


"Large corporate who have incremental borrowing over 100 crores (1 bln rupees) or a large capex requirement have been already coming to bond market and will continue to come. But for smaller corporate, the incremental capex requirement is not great right now," said Anil Gupta, vice president – financial sector rating, ICRA.


Though economic slowdown and credit crunch may have been about bad timing, some of the structural issues of the corporate bond market have also remained sticky.


The market is not deep enough to fund big projects in the absence of large institutional investors willing to take risks as banks do in the loan market, bond dealers pointed out.


Usually, banks are also present in the bond market for large deals as it gives them an opportunity to continue to participate in the financing or syndicating an issuance for an existing customer. 


And then there is the question of cost, especially for manufacturing companies.


While there is not much price discovery happening in the bonds above AA rating, dealers said that AAA-rated manufacturing companies have to shell out 100-120 basis points for five-year maturity bonds over corresponding government securities.


The cost gets steeper for AA-rated issuers that have to cough up 140-160 bps over the government bond of similar maturity. These spreads, however, vary depending upon the company's business, borrowing pattern, and cash flows.


"Cement, or steel projects can't be financed through the bond market. This pushes companies back to the banks. And because banks have to carry a higher capital charge in the form of risk weights, they will recover that from the borrower. Eventually if banks will be funding the project, even through bonds, there won't be much pricing benefit for the borrower," said a senior official with a large private sector bank.


After initial conversations, most companies, especially the ones not from metro cities, are unwilling to even test the market unless it makes a substantial difference in the cost, the official added.

The Reserve Bank of India's rule restricting banks' exposure to a corporate group has also failed to shift demand to the bond market amid lower credit growth. 


Credit growth of banks fell to a 17-month low of 10.25% in the fortnight ended Aug 30.


"Data points show that between March and now, incremental credit has not grown. So, we can expect more issuances only when we see that the incremental credit is growing," ICRA's Gupta said.


Borrowers are less likely to tap the market in the current scenario amid heightened risk aversion and widened spreads, and may come to the market only in the next year if spreads soften, he said.


SEBI's effort to soft land the mandatory borrowing through bonds has not helped the matter either. 


A penalty of 0.2% of the shortfall in the borrowed amount will be imposed on companies that don’t comply with norms, but only from 2021-22 (Apr-Mar). For first two years, companies unable to comply with the norms will have to just provide an explanation for the shortfall and this has made the companies lax, dealers said. 


Typically, companies approach bond markets in Oct-Mar for their incremental funding needs, but according to analysts, the current trend does not suggest that there will be any phenomenal growth.

Until then, SEBI's mandate will remain among the numerous measures taken at least over a decade to deepen India's corporate bond market.  End


Edited by Arshad Hussain

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