The Securities Exchange Board of India (SEBI) has decided to water down regulations that forced large corporates to mandatorily tap the bond market for part of their borrowing needs. The decision is pragmatic, as a number of companies impacted by these rules have found them impossible to comply with. It was at the behest of the Centre that SEBI ushered in the ‘large corporates borrowing framework’ in end-2018. From FY20, all listed companies with long-term borrowings of ₹100 crore or more and a credit rating of AA and above were asked to source 25 per cent of their incremental debt needs through the market.
Companies which couldn’t meet the quota by FY22 had to pay penalty of 0.2 per cent on the shortfall. Three years on, between 38 and 50 of the 130-150 companies with borrowing requirements have been unable to meet this quota. Therefore, SEBI has sought to raise the borrowing threshold for ‘large corporates’ from ₹100 crore to ₹500 crore. The penalty for non-compliance will be removed. Companies will be assessed over a three-year window to ensure compliance. While these concessions are welcome, if SEBI and the government are keen on improving ease of doing business, they should consider rolling back these regulations in toto.
There are many practical reasons why a compulsory quota for bond market borrowings is impractical for firms irrespective of their size. One, companies need to be able to borrow from sources that minimise their borrowing costs. In India, attractive loan deals are sometimes available from banks/financial institutions and sometimes from the bond market. Not allowing companies to shift flexibly between these two routes, blunts their competitive edge. Two, in a bid to promote Make in India and exports, the government offers many interest subsidy and loan schemes to targeted sectors. These are available only through banks and financial institutions and not through bond markets. Three, despite ongoing policy efforts, India’s bond market remains shallow and is an unreliable source of funding for most companies, save AAA-rated issuers.
Lower-rated companies are often crowded out by bluechip companies and Central and State government issuances. Domestic corporate bond issuances are just recovering from a six-year low of ₹5.9-lakh crore in FY22, after credit curbs and adverse tax changes for debt mutual funds shrank the pool of active buyers. The bond market, beset by not just supply but also demand-side issues, must be allowed to develop organically. On the demand side, institutional investors such as insurers, pension funds and EPFO must build in-house credit appraisal skills. India’s equity markets have seen a quantum jump in depth and participation in recent years thanks to easy on-boarding, friction-free trading and a democratised secondary market — where individuals and institutions enjoy a level playing field. The bond market may need a similar shift , before corporate bonds really take off.