 "Panel suggests forcing large firms to bond market")
A working group committee on development of corporate bond market has recommended that large companies should be forced to access the bond market for a part of their capital needs and that all companies should strive to reissue their bonds, instead of frequently issuing fresh papers.
“Large corporates with borrowings from the banking system above a cut-off level may be required to tap the market for a portion of their working capital and term loan needs,” suggested a report of the committee headed by just retired Reserve Bank of India (RBI) Deputy Governor H R Khan. The working group was set up by a sub-committee of the Financial Stability and Development Council and has representation from all regulators, and from the government.
RBI had, in May, suggested that banks should cut down lending to highly leveraged companies and force them to tap the bond market route instead.
Banks, PDs, brokers can be allowed as market makers
Electronic book mechanism should be mandatory
The panel suggested that insurance companies and pension funds should be allowed to invest in additional tier-1 bonds of banks, subject to prudential limits with credit rating up to investment grade.
Investment by insurance companies and Employees’ Provident Fund Organisation in additional tier-1 bonds of banks is a long pending issue. The nature of the bonds, which force investors to accept losses in cases where a bank is in stress, make the bonds a risky instrument and beyond the scope of risk-averse investors.
One major recommendation by the committee is to accept the corporate bonds as collateral for accessing liquidity from the RBI.
“Acceptance of corporate bonds as collateral under central bank’s liquidity management framework may incentivise banks and PDs (primary dealers – underwriters of government bonds) to invest in corporate bonds and thereby create demand for corporate bonds,” the group said, citing international practice in this regard. It is not uncommon for central banks to take a lead with a view to developing the financial market. “However, it is desirable that such a step is taken after the market repos gain some traction on their own.”
“Development of corporate bond market has always been the urge, and particularly in the current environment. In the prevailing neutral liquidity condition, expanding liquidity adjustment facility securities by top-rated corporate bonds is feasible. But, most importantly, creating investor base for additional tier-1 bond is essential, keeping in mind the short time-frame,” said Soumyajit Niyogi, associate director, at India Ratings & Research.
Total corporate bond issuance increased from Rs 1,74,781 crore in 2008-09 to Rs 4,13,879 crore in 2014-15, while the number of issuances increased by almost 153 per cent from 1,042 in 2008-09 to 2,636 in 2014- 15. “Secondary market trading, however, continues to be very limited at around Rs 2,000 crore per day,” the group noted.
The report was released by the Securities and Exchange Board of India (Sebi) on its website, a week before RBI is scheduled to announce its measures on deepening corporate bond market. The RBI measures, it is fair to assume, would be built around the Khan Committee report. In its report, the panel suggested that the issuers coming out with “frequent debt issues with the same tenor during a quarter should club them under the same umbrella,” which, in turn, would “increase the float in the market, thus, enhancing its liquidity.”
These issuers should come out with a feasible maturity structure wherein the redemption amount could be staggered by amortising the repayments, the report said. Such reissuance should be exempted from stamp duty and, therefore, cost-effective for the companies too.
Besides, the corporate governance norms applicable to companies, which have listed only debt securities and not equity, should be reviewed to “make them less onerous,” the report suggested.
To make the bond issuances standardised, Sebi should have a relook at some of its guidelines that determine the pricing of the bonds. The panel also encouraged allowing foreign portfolio investors to put their money in unlisted debt securities, or securities issued by special purpose vehicles of companies. This particular point was also discussed in the Union Budget of 2016-17 and the RBI is expected to come up with its notifications this month. “Regulated entities like banks, PDs (primary dealers - underwrites of govt bonds), in addition to brokers, may be encouraged by the regulators to act as market makers in corporate bond market subject to appropriate risk management framework,” the group suggested.
To make the market more transparent, the committee suggested that all primary issuances should go through an electronic book mechanism. Currently, only those issuances of Rs 500 crore and above are mandatorily to undertake this procedure.
For valuing the corporate bonds, a uniform method should be followed, the group said. “All regulators may explore an acceptable mechanism for valuation including engaging the Financial Benchmarks India Pvt Ltd or credit rating agencies for the same, with necessary safeguards and regulatory oversight.”
The group suggested that a commonly acceptable market repo agreement should be drawn up and electronic trading platform with the ability to execute repo in corporate bonds should be introduced. Repo means pledging a bond to borrow. Currently, repo in corporate bond is almost non-existent. “Right now, people are not comfortable with bilateral repo on corporate bonds, especially as there is no secondary market. If RBI allows a guarantee mechanism, other than those proposed by private parties, the bonds will start getting traded in the market,” said a senior bond dealer with a large bond arranging firm.
The group proposed that there should be a depository for repo in corporate bonds and guidelines on tripartite repo on corporate bonds should also be introduced by depositories in consultation with Sebi by end-September.
“Large corporates with borrowings from the banking system above a cut-off level may be required to tap the market for a portion of their working capital and term loan needs,” suggested a report of the committee headed by just retired Reserve Bank of India (RBI) Deputy Governor H R Khan. The working group was set up by a sub-committee of the Financial Stability and Development Council and has representation from all regulators, and from the government.
RBI had, in May, suggested that banks should cut down lending to highly leveraged companies and force them to tap the bond market route instead.
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The panel suggested that insurance companies and pension funds should be allowed to invest in additional tier-1 bonds of banks, subject to prudential limits with credit rating up to investment grade.
Investment by insurance companies and Employees’ Provident Fund Organisation in additional tier-1 bonds of banks is a long pending issue. The nature of the bonds, which force investors to accept losses in cases where a bank is in stress, make the bonds a risky instrument and beyond the scope of risk-averse investors.
One major recommendation by the committee is to accept the corporate bonds as collateral for accessing liquidity from the RBI.
“Acceptance of corporate bonds as collateral under central bank’s liquidity management framework may incentivise banks and PDs (primary dealers – underwriters of government bonds) to invest in corporate bonds and thereby create demand for corporate bonds,” the group said, citing international practice in this regard. It is not uncommon for central banks to take a lead with a view to developing the financial market. “However, it is desirable that such a step is taken after the market repos gain some traction on their own.”
“Development of corporate bond market has always been the urge, and particularly in the current environment. In the prevailing neutral liquidity condition, expanding liquidity adjustment facility securities by top-rated corporate bonds is feasible. But, most importantly, creating investor base for additional tier-1 bond is essential, keeping in mind the short time-frame,” said Soumyajit Niyogi, associate director, at India Ratings & Research.
Total corporate bond issuance increased from Rs 1,74,781 crore in 2008-09 to Rs 4,13,879 crore in 2014-15, while the number of issuances increased by almost 153 per cent from 1,042 in 2008-09 to 2,636 in 2014- 15. “Secondary market trading, however, continues to be very limited at around Rs 2,000 crore per day,” the group noted.
The report was released by the Securities and Exchange Board of India (Sebi) on its website, a week before RBI is scheduled to announce its measures on deepening corporate bond market. The RBI measures, it is fair to assume, would be built around the Khan Committee report. In its report, the panel suggested that the issuers coming out with “frequent debt issues with the same tenor during a quarter should club them under the same umbrella,” which, in turn, would “increase the float in the market, thus, enhancing its liquidity.”
These issuers should come out with a feasible maturity structure wherein the redemption amount could be staggered by amortising the repayments, the report said. Such reissuance should be exempted from stamp duty and, therefore, cost-effective for the companies too.
Besides, the corporate governance norms applicable to companies, which have listed only debt securities and not equity, should be reviewed to “make them less onerous,” the report suggested.
To make the bond issuances standardised, Sebi should have a relook at some of its guidelines that determine the pricing of the bonds. The panel also encouraged allowing foreign portfolio investors to put their money in unlisted debt securities, or securities issued by special purpose vehicles of companies. This particular point was also discussed in the Union Budget of 2016-17 and the RBI is expected to come up with its notifications this month. “Regulated entities like banks, PDs (primary dealers - underwrites of govt bonds), in addition to brokers, may be encouraged by the regulators to act as market makers in corporate bond market subject to appropriate risk management framework,” the group suggested.
To make the market more transparent, the committee suggested that all primary issuances should go through an electronic book mechanism. Currently, only those issuances of Rs 500 crore and above are mandatorily to undertake this procedure.
For valuing the corporate bonds, a uniform method should be followed, the group said. “All regulators may explore an acceptable mechanism for valuation including engaging the Financial Benchmarks India Pvt Ltd or credit rating agencies for the same, with necessary safeguards and regulatory oversight.”
The group suggested that a commonly acceptable market repo agreement should be drawn up and electronic trading platform with the ability to execute repo in corporate bonds should be introduced. Repo means pledging a bond to borrow. Currently, repo in corporate bond is almost non-existent. “Right now, people are not comfortable with bilateral repo on corporate bonds, especially as there is no secondary market. If RBI allows a guarantee mechanism, other than those proposed by private parties, the bonds will start getting traded in the market,” said a senior bond dealer with a large bond arranging firm.
The group proposed that there should be a depository for repo in corporate bonds and guidelines on tripartite repo on corporate bonds should also be introduced by depositories in consultation with Sebi by end-September.