Sebi rule means additional bond issuance worth ~500 bn: CRISIL

The Securities and Exchange Board of India’s (Sebi’s) new framework to push large listed companies towards the debt market could result in additional corporate bond issuance worth ~500 billion over the next five years, said rating agency CRISIL.

Under the new rule (to take effect from April 1 next year), large companies have to raise a fourth of their incremental borrowing for a year through corporate bonds.

A large corporate is defined as one having outstanding borrowing of ~1 billion or more, credit rating of ‘AA’ or higher, and intending to mobilise long-term funds.

The decision was taken to reduce the load on the banking system and deepen liquidity in the corporate bond market. The new rule applies to 444 companies, said CRISIL. Their combined long-term borrowing was ~45 trillion in 2017-18, about 35 per cent of the total credit taken of ~130 trillion.

CRISIL said that 210 of these 444 companies have already been sourcing at least a fourth of their funding requirement from the corporate bond market. “So, the remaining 234 will be the ones driving incremental issuances. At present, they hold only ~6 trillion of rated, long-term debt,” said the agency.

CRISIL projects incremental issuance at ~400-500 billion over the next five financial years. “(This) will also be a function of the private sector investment cycle, and trends in the corporate bond and external commercial borrowing markets,” it added.

In the first two years of implementation (financial years 2020 and 2021) a ‘comply or explain’ approach will apply. Failure to comply beyond 2020-21 will invite a fine, equivalent to 0.2 per cent of the shortfall in bond issuance.

CRISIL President Gurpreet Chhatwal said: “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.” Had Sebi lowered the rating threshold, the corporate bond market would have got an even bigger push, says CRISIL.

“The inclusion of ‘A’ category and unlisted corporates would have made 1,400 companies, with total debt of ~15 trillion, eligible. This would have not only materially increased the supply but also improved the risk appetite and diversity of sectors in the market.”