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What does SEBI's attempt at restructuring corporate debt mean for the bond market?
The regulator’s move to give a fillip to India’s nascent corporate bonds market stems from a Budget proposal earlier this year. By operationalizing the Budget announcement, the quantum of future borrowings by large corporates from the banking sector will gradually wean off.
In an attempt to lighten the burden of bad loans on the banking sector, market regulator Securities and Exchange Board of India (SEBI) on July 20, proposed that companies with borrowings exceeding Rs 100 crore should meet 25 percent of their loan requirement through the bond market. The new framework could come into force on April 1, 2019. Market participants have been given time until August 13 to send a feedback to improve the fine print of the document.
The regulator’s move to give a fillip to India’s nascent corporate bonds market stems from a Budget proposal earlier this year. By operationalizing the Budget announcement, the quantum of future borrowings by large corporates from the banking sector will gradually wean off.
So, what does the change in borrowing norms mean for large companies?
If a company wants to borrow Rs 1,000 crore to fund infrastructure development in 2019-20, it will have to mandatorily raise Rs 250 crore by issuing bonds, while the remaining capital can be raised from other sources. Under the proposed framework, the definition of a large corporate is based on its outstanding long-term borrowings that is exclusive of inter-corporate deposits and external commercial borrowings (ECBs).
Inter-corporate deposits include money that is kept in one company by another for a term of six months. An ECB is a financial instrument used by entities to borrow from foreign sources, such as multinational banks or non-resident Indians (NRIs), for commercial activities in India.
It remains to be seen whether levying a monetary penalty will be a deterrent to non-compliance. For example, if a company issued bonds to raise only 15 percent of its aggregate long-term borrowing of Rs 100 crore, it will have to pay 0.2 percent of Rs 10 crore, which amounts to Rs 2 lakh.
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