Indian Defaults Spark Rules That Drag Bond Sales to 2008 Low
Indian two thousand and five hundred rupee banknotes arranged for a photograph. (Photographer: Dhiraj Singh/Bloomberg)

Indian Defaults Spark Rules That Drag Bond Sales to 2008 Low

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Rising defaults have prompted India to tighten oversight of corporate bond sales, causing issuance to slump in a blow to a long-sought goal of expanding the market.

Offerings of rupee notes have fallen to 43.8 billion rupees ($584 million) this month, the slowest start to a financial year since 2008. That’s due in part to rules that took effect April 1 strengthening the role of trustees for secured bonds backed by assets. Such offerings have made up about 60% of India’s total domestic issuance in the last 10 years.

Indian Defaults Spark Rules That Drag Bond Sales to 2008 Low

Firms defaulted on at least 52 billion rupees of domestic bonds so far this year, the most on record for a similar period. That comes as a setback as Covid-19 cases surge recently. It also reverses the trend from last year when unprecedented stimulus helped the pace of non-repayment slow from an all-time high in 2019.

What The New Rules Do

  • Starting this month, bond trustees need to evaluate and ensure that assets backing bonds are at all times adequate to discharge the interest and principal amount.
  • They have to carry out checks and validate that the issuer has the necessary permissions from lenders in case the company creates any further charge on the asset.
  • The trustees also need to provide ‘due diligence certificates’ to the issuer at the time of filing a draft offer agreement and before the notes are listed.

What’s Next

  • Some bond arrangers see the slowdown in the primary market as temporary, and expect issuance to pick up as companies comply with the new regulations.
  • Issuance of unsecured bonds, which aren’t covered by the rules, may roll on. Bankers say offerings of such notes from government-owned companies that tend to sell them should continue apace.
  • State-run REC Ltd. is seeking bids for as much as 40 billion rupees of unsecured notes maturing in 2024 on Monday.

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