About Rs 40,000-50,000 crore of additional corporate bond issuances are likely over the next five years following the Securities and Exchange Board of India’s (SEBI) move to shift a quarter of the incremental annual – and long-term – borrowings by large companies away from banks.
That compares with an issuances of ~Rs 6.56 lakh crore seen in fiscal 2018 alone.
Incremental issuances will also be a function of the private sector investment cycle and trends in the corporate bond and external commercial borrowings markets.
The SEBI framework says large corporates – defined as having outstanding borrowing of Rs 100 crore or more, a credit rating of ‘AA’ or higher, having its securities listed on a stock exchange, and intending to mobilise long-term funds – have to raise 25% of their incremental borrowings for a year through corporate bonds.
CRISIL’s analysis shows 444 companies with aggregate rated long-term borrowings of ~Rs 45 lakh crore as of fiscal 2018 come in this category. They accounted for ~35% of the total credit outstanding of Rs 130 lakh crore as of last fiscal.
However, around 210 of these 444 companies have already been sourcing at least a quarter of their funding needs from the corporate bond market. So the remaining 234 would be the ones driving incremental issuances. At present, they hold only ~Rs 6 lakh crore of rated, long-term debt.
Says Gurpreet Chhatwal, President, CRISIL Ratings, “SEBI’s framework is a step in the right direction to deepen the corporate bond market and usher in a market-oriented, risk-based pricing culture. Another Rs 200,000 crore of issuances would have been possible if the framework had included ‘A’ category papers and unlisted corporates.”
The inclusion of ‘A’ category and unlisted corporates would have made ~1,400 companies with total debt of Rs 15 lakh crore eligible. This would have not only materially increased the supply, but also improved the risk appetite and diversity of sectors in the domestic corporate bond market.
Currently, there is high concentration of ‘AA’ category papers and 70% of the issuances are by companies from the financial sector.
Says Somasekhar Vemuri, Senior Director, CRISIL Ratings, “Going down the rating spectrum in terms of issuances is expected to be a gradual process because the market needs to absorb the incremental supply. And for that to happen, pensions and insurers will have to be empowered to invest in ‘A’ rating category bonds.”
The framework comes into effect from April 1, 2019. In the first two years of implementation – fiscals 2020 and 2021 – a ‘comply or explain’ approach will be applicable. Failure to comply beyond fiscal 2021 will invite a fine equivalent to 0.2% of the shortfall in bond issuances.