Borrowing cost for companies to go up on Sebi's new framework

Indian-listed companies rated AA and above, having an outstanding debt of more than Rs 100 crore, will have to tap the bond market from April 1 for a quarter of their incremental long-term borrowing needs, according to a circular by the Securities Exchange Board of India (Sebi), but firms contend that it will jack up their borrowing cost and may not be very practical.

The rule is valid only for long-term borrowings, but both bond arrangers and corporate treasury officials say the bond market doesn’t offer adequate bandwidth to borrow long-term money beyond two years and projects cannot be done based on such borrowings. 

“Banks can offer money for 9-10 years, but the bond market cannot give money beyond one or two years. This is a serious asset-liability and timing mismatch. Every corporate wants long-term loan, but our bond market is not ready for it yet,” said Prabal Banerjee, group finance director at Bajaj Group. 

According to Care Ratings, the challenge for corporates would be to look at two sources of fund-raising and bear the additional expense of the cost of interest. “Interest rate management becomes more important for these corporates, especially in a rising interest rate scenario of the economy,” Care had said when Sebi’s draft circular had come in July. 

Data culled from Capitaline shows that including public sector units (PSUs), the incremental long-term borrowing between 2016-17 and 2017-18 amounted to Rs 18.9 trillion. Assuming the same amount of borrowing in the 2019-20 fiscal year, 25 per cent of the borrowing from the bond market stands at Rs 4.72 trillion. 

Admittedly, most of these companies borrow from the bond market, and public sector units are regular borrowers from this market. The material impact would then have to come from the private sector corporate groups, many of them have not hit the bond route so far.

According to a Crisil research analysing 444 companies, 210 have already been sourcing 25 per cent of their incremental borrowing through the corporate bond market.

“So the remaining 234 would be the ones driving incremental issuances. At present, they hold only Rs 6 trillion of rated, long-term debt,” Crisil said, adding about Rs 40,000-50,000 crore of additional corporate bond issuances are likely over the next five years to comply with Sebi rules.

An India Ratings research, however, puts the number much higher — Rs 65,000 crore of additional borrowing in the first year (2019-20) itself.

India Ratings, however, doesn’t expect any great spurt in capex plan — about Rs 4.58 trillion — 70 per cent of which will be used for maintenance of existing infrastructure. The capex would be an expansion of only 6.5 per cent over 2018-19. 

“The corporate balance sheets don’t have the resilience to support capacity utilisation,” said Arindam Som, analyst with India Ratings and Research.

But that doesn’t mean corporate houses can make do without the bond market. In fact, they will have to borrow from the bond market anyway.

“With the RBI decreasing the single borrower and group lending limits from April 1 2019, corporates are nearing their loan limits, especially with the spurt in loan borrowings in the last two years. Hence, many corporates may come to the bond market, and regular borrowings would lead to familiarity and cheaper rates and a prudent diversification of their borrowings,” said Shameek Ray, head of debt capital markets at ICICI Securities Primary Dealership.

Sebi’s framework comes into effect from April 1 but in the first two years, it is lenient. Failure to comply beyond FY2021 will invite a fine equivalent to 0.2 per cent of the shortfall in bond issuances. However, the forced rules would jack up the cost of borrowing for the companies and may push up overall rates in the economy as well.

According to India Ratings, on a net basis, the fresh issuance in the bond market would be nearly Rs 14.24 trillion. The central government will borrow Rs 4.7 trillion, the PSUs will borrow Rs 1.8 trillion and the states would line up with Rs 4.3 trillion with their state development loans (SDL). The balance would be mopped up by the corporate bonds.

“Since the SDLs and PSU bonds are already a high-quality substitute of corporate bonds, crowding out will trigger and funding cost will remain elevated for the companies even if there is no significant trigger from the corporate sector,” said Soumyajit Niyogi, associate director at India Ratings.

And on top of that, mutual funds have become risk averse after IL&FS fiasco and appetite for corporate bonds won’t be that much there. Therefore, the wide spread of more than 100 basis points for AAA rated Indian companies over equivalent maturity government bonds would continue to remain so and likely will widen further, negating any benefit arising out of rate cuts by the RBI.