The SEBI headquarters in Mumbai. (Photographer: Santosh Verma)

SEBI Pushes Large Corporates To Borrow More From The Bond Markets

The Securities and Exchange Board of India has joined the effort to diversify borrowings of Indian corporates by asking them to raise at least a quarter of their incremental funds from the bond markets.

Policymakers, including the government and the Reserve Bank of India, have been pushing the case for bond market borrowings as a way to reduce the concentration of risk in the banking sector. Large corporate borrowings have contributed nearly 80 percent of the bad loans in the current cycle. To prevent a repeat of this in future years and to push for greater transparency in borrowings, regulators want corporates to borrow more from the bond markets.

In a discussion paper released on Friday, SEBI proposed that starting April 2019, ‘large corporates’ will need to borrow 25 percent of their incremental funding requirements for the year via the bond markets.

This would apply to listed corporates only, specified the market regulator. The term ‘large corporates’ will be defined as those who have outstanding long-term borrowings of Rs 100 crore or more and a credit rating of AA or above. Lower rated corporates have been exempted from the framework for now due to the limited demand for such securities.

Increased depth in the bond market would allow for the additional borrowings to be supported, suggested the regulator.

Discussions with market participants and analysis of data reveals that the incremental shifting of corporate borrowing to bond market (as a result of this mandatory requirement), on a yearly basis, would be in the range of 5 to 10  percent of the total bond issuances during a year. 
SEBI Discussion Paper
SEBI Pushes Large Corporates To Borrow More From The Bond Markets

Jayanta Roy, senior vice president at ICRA said that bonds rated AA and above should get absorbed by the market and investors. “Only thing is that the issuer’s appetite would depend on the interest rates prevailing in the market,” he said. Roy added that it would have been tougher for companies rated below the AA category to raise funds via bonds since the appetite for that segment is still to be tested.

SEBI’s proposals follow a budget announcement in which Finance Minister Arun Jaitley said the regulator will make it mandatory for large companies to raise about a fourth of their financing needs in the bond market. Earlier, the Reserve Bank of India had asked large ‘specified’ borrowers to raise a portion of their incremental funds from the bond markets. Banks had been asked to set aside higher provisions for those companies that continued to borrow mostly from the banking system, without diversifying their source of funding.

Now, SEBI too has mandated that a portion of incremental borrowings be sourced via debt securities.

“A threshold of Rs 100 crore is low but since this is only for listed securities and AA-rated firms, the bond market should be able to absorb,” said Jayesh Mehta, head of treasury at Bank of America-Merrill Lynch. “It will add to the depth of the bond markets but banks would need to be active participants to absorb the incremental supply,” Mehta said.

SEBI, in its paper, highlighted that the bond markets have deepened over the past few years. In 2016-17, 51 percent of total borrowings came from bonds compared to 37 percent in 2012-13, according to its data. However, borrowings are still heavily skewed towards high rated borrowers, with 90 percent of the issuances concentrated in the AA and AAA rated categories.

Given the existing depth and structure of the bond markets, the proposed rules should not be onerous for corporates, said SEBI while adding that it expects the bond market to deepen further.

It is expected that this requirement may not be onerous on the corporates, given that implementation of IBC (Insolvency & Bankruptcy Code) could result in further deepening of bond market by at least 5 percent of GDP. 
SEBI Discussion Paper
SEBI Pushes Large Corporates To Borrow More From The Bond Markets

SEBI proposes a “comply or explain” framework for the new rules. This means that companies would need to disclose non-compliance as part of “continuous disclosure requirements,” the regulator said. Public comments have been sought till August 13, before guidelines are finalised.