Employees walk past electronic boards displaying stock figures in the atrium of the National Stock Exchange of India Ltd. (NSE) building in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Union Budget: SEBI May Mandate Large Corporates To Tap Bond Market For One-Fourth Fund Needs

To deepen the corporate bond market, the Securities and Exchange Board of India will amend rules to mandate large companies to use bonds to finance one-fourth of their funding needs, Finance Minister Arun Jaitley said today.

Further, the minister said the government and regulator will consider permitting bonds graded 'A' as investment grade, as against 'AA' at present.

The move is aimed at deepening the corporate bond market and encourage companies to tap this route for funds.

SEBI will also consider mandating, beginning with large corporates, to meet about one-fourth of their financing needs from the bond market.
Arun Jaitley, Finance Minister

He also said that Reserve Bank of India has already issued guidelines to nudge corporates to access bond market.

“In India, most regulators permit bonds with the AA' rating only as eligible for investment. It is now time to move from 'AA' to 'A' grade ratings. The government and concerned regulators will take necessary action,” Jaitley said.

Rating agency Moody's said that permitting insurance companies to invest in A-rated bonds will allow a broader range of corporates to better access long term capital.

Most of the big corporations are already moving towards the bond markets to take advantage of the lower cost. Making it mandatory to raise one-fourth of the total borrowing through bonds can push the supply side of the markets.
Moody’s Investors Service

“But there is a lot to be done to boost the secondary market which is essential to improve the price discovery mechanism. More steps are needed to be taken to improve the depth and liquidity of bond markets,” Quantum MF Fund Manager- Fixed Income Pankaj Pathak said.

Market experts believe that long-term capital gains tax would dampen the sentiments of investors, especially as securities transaction tax (STT) continues to exist. Besides, this could be a positive move for the bond markets.

"Overall, this is a positive budget, measures to reviving corporate bond markets auger well for the capital markets," BSE Managing Director and Chief Executive Ashishkumar Chauhan said.

SEBI has been taking a slew of measures to deepen the bond market.

These include allowing foreign portfolio investors to invest in unlisted corporate debt securities as well as putting in place a new framework for consolidation in debt securities.

In its annual report, Sebi had said: “Developing a liquid and vibrant corporate bond market further is an important agenda for enhancing the role of the Indian securities market in channelising long-term finance. Sebi will work with all stakeholders for this.”

(To read more stories on the Union Budget 2018-2019, click here!)