Bilkulonline.com, Ahmedabad, June 30:
- Corporate Bond Market
- Performance of the corporate bond market:
- The corporate bond issuances have increased from Rs 1.74 lakhs crores in the FY 2008-09 to Rs 6.7 lakhs crores in the FY 2016-17. Further the share of public issue of corporate bonds has been high in the FYs 2011-12, 2013-14 and also 2015-16 mainly because of the tax free bonds issues, subscribed by the retail investors. In the FY 2015-16, the amount raised from tax free bond issuances was Rs 31,098 crores.
- It may be noted that private placements of corporate bonds are at its record high in the FY 2016-17. The figure stands at Rs 6.4 trillion though there has not been much of activity in the public issue market.
- In the FY 2016-17, the lending through bank credit is only Rs 1.68 lakh crores whereas lending through corporate bonds has been Rs 5.54 lakh crores, which is very high compared to the bank lending.
- Around Rs 376108.35 crores have been raised through the EBP since July 2016 to June 16, 2017.
- When it comes to rating wise bifurcation of corporate bonds, it is seen that the share of corporate bonds with rating AAA has fallen from 69% in the FY 2010-11 to 57% in the FY 2016-17 (Sept 2016) whereas the share of the bonds having investment grade rating i.e. BBB- has increased from 0 % to 1% over the same period.
- Drivers for corporate bond markets in India :
- The combined efforts of Govt of India, SEBI, and RBI in developing the corporate bond marketing India continues to be the major drivers for the sustained growth of this market.
- The corporate bond repo will help in the development of the corporate bond market.
- Steps taken by SEBI for the development of the corporate bond market:
- In January 2013, SEBI provided Guidelines for setting up of dedicated Debt Segment on Stock Exchanges with separate platform for retails and institutional investors. NSE, BSE and MCX-SX have set up separate debt segments for facilitation of transaction in debt securities on that dedicated platform.
- In September 2013 SEBI prescribed risk management framework for dedicated debt segment of stock exchanges. It also prescribed conditions for DVP-3 settlement of corporate bonds by the clearing corporations, thereby guaranteeing the settlement. The guaranteed settlement would attract more investors to invest in such corporate bonds and lead to increase in liquidity.
- In October 2013, SEBI has mandated both the depositories viz. NSDL and CDSL to jointly create, host, maintain and disseminate the centralized database of corporate bonds/debentures which are available in demat form. Both the depositories have been hosting such database on their respective websites.
- In March 2015, SEBI notified the amendments to the (Issue and Listing of Debt Securities) Regulations, 2008 to include a clause on Consolidation and re-issuance of Debt Securities and right to early redemption by ways of callable and puttable bonds. The enablement of consolidation and re-issuance is likely to avoid fragmentation of debt market with multiple issues and re-issuances can help in creation of large floating stocks which is needed to enhance market liquidity.
- In July 2015, SEBI has notified the SEBI (Issue and Listing of debt Securities by Municipalities) Regulations, 2015 which provides a framework governing the issuance and listing of bonds by Municipalities and will enable the investors to make an informed investment decision before investing in these bonds. These regulations also provide for disclosure requirements to be made by the prospective issuers. The proposed framework provides for public issuance and listing of privately placed municipal bonds.
- On April 21, 2016, SEBI has issued a circular on Electronic book mechanism for issuance of debt securities on private placement basis. The said circular lays down a framework for issuance of debt securities on private placement basis through an electronic book mechanism, in order to streamline procedures for issuance of debt securities on private placement basis and enhance transparency to discover prices.
- On May 25, 2016 SEBI amended the SEBI NCRPS and the SEBI ILDS regulations to impose restrictions on wilful defaulters.
- Sebi is asking credit rating agencies to come out with a slew of disclosures and fix accountabilities so that fiascos like the one caused by the sudden default of Amtek Auto last September are not repeated. SEBI, vide circular dated November 01, 2016 has laid down enhanced standards for the Credit Rating Agencies. The agencies will have to spell out how rating is conducted, responsibilities of analysts, and evaluate the performance of their respective rating committees — particularly if there’s an unforeseen default.
- SEBI has issued a circular dated Nov 11, 2016 laying down the uniform norms for day count convention, interest payments calculations in the context of leap year.
- A framework for an electronic platform for repo market in corporate bonds is proposed to be developed. Such a platform would provide the much needed boost to increase the liquidity in the corporate bond market through the repo platform.
- A complete information repository for corporate bonds, covering both primary and secondary market segments has been implemented. Such a repository would provide all the consolidated information at one place, which would enable the investors to take informed decisions.
- SEBI also has taken up with various other regulators such as IRDAI, PFRDA etc. to ease down the investment restrictions on their respective regulated entities for investments in corporate bonds.
- Electronic Trading Platform:. SEBI, vide circular dated February 10, 2017 had specified that In case of shortage of delivery, stock exchanges/clearing corporations may conduct financial close-out. The financial close out shall take place at highest price on Trade date (which becomes the trade price) with a 1% mark-up on trade price. Further, Exchanges/Clearing Corporation shall introduce an uniform auction mechanism to deal with settlement shortages by March 31, 2017.
- SEBI, vide its circular dated May 30, 2017 had issued guidelines on “Disclosure requirements for issuance and listing of green debt securities”. The said circular, inter-alia, lays down criteria for the debt securities to be classified as “Green” or “Green debt securities”, disclosure requirements as well as continuous disclosure requirements for green bonds and the responsibility of the issuer of green debt security
- Steps taken by RBI for the development of the corporate bond market:
- RBI has issued guidelines on August 25, 2016 on enhancing credit supply for large borrowers through market mechanism and the same will be effective from 01.04.2017. These guidelines mandate banks to provide for additional risk weights of 75% and standard asset provisioning of 3% when lending to the banking sector beyond normal permissible lending limits. For the FY 2017-18 the Specified borrower shall be the one who shall have aggregate fund based sanctioned credit limits of more than Rs 25, 000 crores.
- RBI vide its notification dated April 11, 2017 issued draft guidelines on Tri-Party Repo (Reserve Bank) Directions, 2017. The guidelines provide for Tri-party repo which can be traded Over-the-counter (OTC) including on electronic platforms. The guidelines also provide eligible participants, eligible collateral, haircut, tenor of repo, documentation and settlement mechanism but nowhere do they mention about the guaranteed settlement for repo in corporate bonds.
- Challenges for corporate bond markets in India:
- Investment Norms: The investment norms of insurance companies, banks, pension funds are heavily skewed towards investment in government and public sector bonds which acts as a detriment to the corporate bond market development. There is a requirement to relax norms for long term institutional investors.
- Loan vs Bond financing: In India, the corporate mostly resort to bank financing instead of bond financing due to the availability of the cash credit and bank overdraft facilities and structuring of the loans as per the needs of the corporate. This leads to lesser demand for the corporate bonds.
- High rated issuers tapping the market: Large proportion of high rated bonds/ with very little or no lower rated issues including non-investment grade bonds. Lower rated issuers tend to stay away from corporate bond markets due to the prohibitive structuring costs as well as the high premium demanded by investors.
- Municipal bond market in India
- SEBI has issued a framework for Municipal bonds. These regulations are called as the SEBI (Issue and Listing of Debt Securities by Municipalities) Regulations, 2015. The regulations provide a framework governing the issuance and listing of bonds by Municipalities and will enable the investors to make an informed investment decision before investing in these bonds.
Pune Municipal Corporation is the first municipality to issue municipal bonds amounting to Rs 200 crores.
- Vide notification dated February 15, 2017, amendment has been made to the SEBI (Issue and Listing of Debt Securities by Municipalities) Regulations, 2015 to provide for a criteria alternative to “Networth” for municipalities making public issue of debt securities under these regulations. In order to facilitate issuance of debt securities under these regulations by entities other than Corporate Municipal Entity (CME), it has been provided that the municipalities making public issue of debt securities under these regulations shall have surplus as per its Income and Expenditure Statement, in any of the immediately preceding three financial years or any other financial criteria as specified by SEBI from time to time.
- SEBI has issued a circular dated March 22, 2017 regarding submission of accounts by municipalities for private placement of debt securities issued under the SEBI (Issue and Listing of Debt Securities by Municipalities) Regulations, 2015. (ILDM regulations)
In view of the operational procedures followed by municipalities for submission of accounts, it would be difficult for them to submit the audited accounts for the immediately preceding financial year, in the information memorandum submitted to the stock exchanges, for the private placement issue of debt securities.
Hence, in order to kick-start and provide an impetus to the municipal bond market in India, it has been decided to provide following dispensation to the municipalities with respect to submission of accounts for private placement issues of debt securities under the SEBI ILDM regulations:-
“Any issuer proposing to issue debt securities under these regulations, in the FY 2017-18, shall submit the following documents:
- Audited accounts for the financial years 2013-14, 2014-15 and 2015-16 in the information memorandum to the stock exchanges.
- For the immediately preceding FY i.e. FY 2016-17, the issuers shall submit the half yearly financial statements, as available (audited or unaudited) as on September 2016.
However, the audited accounts for the said FY i.e 2016-17 shall be submitted within one year from the end of that FY (i.e. by March 31, 2018) to the recognized stock exchanges, where the debt securities have been listed. Such audited accounts shall be displayed on the website of the recognized stock exchanges and the issuer. The issuers shall also be required to provide on request, a copy (physical or electronic) of such audited accounts to its investors.”