An electronic board indicates the latest stock figures at the National Stock Exchange (NSE) in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

Funds Raised Via Market-Linked Debentures Nearly Double Amid Liquidity Crunch

Funds raised by companies through market-linked debentures nearly doubled in the ongoing financial year as payment defaults at IL&FS caused a liquidity crunch.

Corporate houses, non-bank lenders and housing finance companies raised around Rs 12,910 crore worth of long-term funds through market-linked debentures—bonds with coupon rate linked to the performance of the Nifty 50 Index or government securities—so far in 2018-19, according to a CARE Ratings report. That compares with nearly Rs 7,365 crore worth of borrowings through these instruments in the previous fiscal.

The rating agency expects total fundraise via this route to touch Rs 14,000 crore by March as more companies are expected to issue these instruments in the coming weeks. “Investors’ preference to secure a decent return on investment and capital protection in volatile and uncertain conditions is expected to augur well for the overall market-linked debenture market,” it said.

After the IL&FS crisis triggered a credit crunch starting September, CARE said the number of issuers of market-linked debentures nearly doubled from the previous fiscal to about 20 as of December. As more companies opt for these instruments, it said the average monthly borrowing of market-linked debentures (principal protected) rose to Rs 1,000 crore this financial year from Rs 600 crore in 2017-18.

Market- or equity-linked debentures allow companies to diversify their borrowing profile to retail and ultra-high-net-worth investors. The instruments help companies comply with the regulations that mandate corporate houses to borrow a minimum of 25 percent from the capital market.

Around 70 percent of market-linked debentures issued this financial year were structured with Nifty 50 as the underlying reference index.

Also, issuers can make bullet repayments—lump sum at the end of maturity—in market-linked debentures. In comparison, non-convertible debentures issuers have to make monthly or annual coupon payments. This allows companies to better manage their liquidity and debt-repayment obligations over the tenure of the debenture.