Deferred rate cuts, sluggish growth and tax-free bond issuances might result in slower private placement of corporate bonds in the second half of the current financial year, October-March.
“Corporate entities are waiting for interest rates to come down further, as they want to minimise interest costs. We do not expect rate cuts by the Reserve Bank of India (RBI) to be fast, due to which corporate bond issuances by way of private placements are going to be slow,” said Ajay Manglunia, senior vice-president, Edelweiss Capital.
The Street is expecting status quo on interest rates from the central bank in Monday’s mid-quarter review of monetary policy. “The market desires a rate cut but a large number of people feel it may not happen, due to sticky inflation. If there is a rate cut by RBI, issuances may pick up. The other concern is slowing growth, which will also have an impact on issuances,” said Ramesh Kumar, senior VP, Asit C Mehta Investment Interrmediates.
According to data published by the Securities and Exchange Board of India (Sebi), issuers raised Rs 131,505 crore through private placement of corporate bonds in April-July. In the first half of last year (April-September), the amount raised was Rs 116,375 crore and in the second half, the corporate sector had raised Rs 144,908 crore.
In the current financial year, April-July was better in terms of issuances than the first half of 2011-12. According to K P Jeewan, head, fixed income, Karvy Stock Broking, this was because many new issuers had tapped the market.
Also, European banks were not very aggressive, due to which there was a lack of demand for Indian paper abroad. This resulted in companies tapping the domestic market, he said.
Jeewan points to another reason why issuances by way of private placement might get slower in the second half. “The market is set to witness tax-free bond issuances worth Rs 60,000 crore. These will relieve pressure in terms of demand for funds; it is also cheaper to raise funds through this route,” he said.
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According to Jeewan, a 10-year paper of an AAA-rated public sector undertaking could be priced at 7.8 per cent in a tax-free bond issue and the same paper might be priced at 9.2 per cent in a private placement of corporate bonds. AAA is the highest ranking given by credit rating agencies and it signifies a firm has extremely strong capacity to meet its financial commitments.
For this year, tax-free bond issuances have been doubled. Former finance minister Pranab Mukherjee had said, while presenting the Union budget, “For 2011-12, tax-free bonds for Rs 30,000 crore were announced for financing infrastructure projects. I propose to double it to raise Rs 60,000 crore in 2012-13.”