By Rajeev Jhawar (firstname.lastname@example.org) [Updated as on September 18, 2018]
In a vibrant market, resides a healthy economy. On the budget day, India sought to expand its bond market beyond the traditional ambit of sovereign debt. In pursuant to this, Securities and Exchange Board of India has initiated to diversify borrowings of Indian corporates by mandating to raise at least a quarter of their incremental funds from the bond market. The regulator came out with a consultation paper in order to address the liquidity problem persisting in the bond market, with an intention to create a robust secondary market for the debt securities in India.
SEBI’s proposal and corresponding inferences
The regulator proposed that listed entities other than scheduled commercial banks, with outstanding long-term borrowings of Rs. 100 crores and a credit rating of “AA and above” and intends to finance itself with long-term borrowings** will have to compulsorily raise 25% of their debt from the bond market from the next financial year, as a part of corroborating the same. Lower rated corporates have been exempted from the framework for the time being due to the limited demand for such securities.
**Further, SEBI has clarified that the term “borrowing” shall mean the borrowings which have original maturity period of more than 1 year. However, such borrowings shall exclude external commercial borrowings (ECBs) and inter-corporate borrowings between a parent and subsidiary. This means that a company taking inter-corporate borrowings from any another company will be included in the definition of borrowing. However, ECBs shall be excluded from the definition of borrowing for every company.
It is believed that if the 25% norm is followed religiously, it would tantamount to increased bond floatation as more companies would be able to access the debt market. Ideally, the move should provide insurance companies, provident funds and pension funds an opportunity to invest in high yielding instruments and open up a new funding avenue for lower-rated companies. Besides, the government might limit corporates’ dependence on banks and the risk associated with it. However, there is a need for an expansion in the investor base for implementation of these rules.