Budget 2018: Proposal on A-rated paper likely to deepen bond market

Allowing fund managers to invest in 'A' rated securities paper is expected to expand the bond market, improve liquidity in debt instruments and allow long-term players like insurance and pension companies to earn higher returns.

The Union Budget proposals said corporate bonds rated ‘BBB’ or equivalent are investment grade. In India, most regulators permit bonds with the ‘AA’ rating only as eligible for investment; it is time to move from ‘AA’ to ‘A’ grade and the government and regulators will act.

N S Venkatesh, chief executive, Association of Mutual Funds in India, said this was one step to deepen the bond market. It would expand the pool of investment-grade securities that investment managers can look at to deploy funds when the government wants large companies to raise money from the bond market.

At present, over 80 per cent of bond issuances are restricted to AAA and AA ratings; the top 10 issuers account for 40 per cent of issuances. The proposed amendments would broaden the debt capital markets, rating agency ICRA said.

It will expand the pool of investors and also improve liquidity in the bond market, especially for AAA and AA bonds. When sector regulators and the authorities for pension and insurance allow investment in A-rated paper, there would be shuffling of the existing portfolio to buy into this, bond dealers and analysts said.

Regulatory recognition for investment in bonds to include A-rated bonds, in addition to existing stipulation of only up to AA, is a win-win for both investors and issuers. It will help bridge the demand-supply mismatch. Risk-adjusted returns will be key for investment decision making, according to rating agency CRISIL.

Looking at it as long investment, funds and investment managers will prefer to hold A-rated paper into the 'Held to Maturity' category. This would also carry relatively higher yield, benefiting pension and provident funds which look for long-term investment avenues.    

    

On the government mandating companies to raise about 25 per cent of funds from the bond market, CRISIL said the proposal to nudge large borrowers here would improve the breadth and depth. 

Its analysis, based on FY17 data pertaining to 100 listed large non-finance borrowers, indicates 20 new issuers would have been required to tap the bond market. The incremental bond issuance by these 100 firms would have gone up by 10-15 per cent. 

This might be slightly impacted by higher interest rates in the short term, from the perspective of borrowing cost vis-a-vis the banking sector. In the long run, this would increase the fund raising pattern through bond issuance, CRISIL added.