Sebi diktat hits commercial papers; traded volume slips to Rs 34,659 crore

The mutual fund (MF) industry, which has been steadily bringing down its exposure to commercial papers (CPs) issued by non-banking financial companies (NBFC), seem to have further shunned the paper after a diktat by the capital market regulator to invest only in those that are listed with the exchanges.

CPs are short-term debt instruments maturing in less than a year, and are issued by companies other than banks. The Securities Exchange Board of India (Sebi) had in December notified the rule, making it mandatory for MFs to invest in listed CPs only. 

However, the move was announced first in August and said it would be implemented in a phased manner. 

In January so far, the total traded volume of the CPs has been Rs 34,659.85 crore, lower than December’s Rs 49,066 crore, the data sourced from Fixed Income Money Market and Derivatives Association of India (FIMMDA) shows. In December 2018, the total CP traded was Rs 1.16 trillion, which increased to Rs 1.19 trillion in January 2019. 

The fall in volume has happened despite rates coming down by 135 basis points between February and December 2019, as the short-term money market instruments passed on the entire rate cut by the Reserve Bank of India in the period. 

Experts say the Sebi rule has played a part but it is also a reflection of the funding crisis that NBFCs are going through. The market is not willing to roll over the past CPs of weaker NBFCs after the IL&FS and DHFL crisis. Some well-known NBFCs have also been rapidly downgraded by rating agencies, making it difficult for them to get funding from the market. 

“High system liquidity, relatively stable liquid fund AUMs (assets under management), and listing requirement have had an impact on secondary market volumes. While the new rule pertaining to listed CPs have come to effect now, MFs had started to demand clarity on listing compliance from sellers in December itself,” said Siddharth Chaudhary, senior fund manager-fixed income, Sundaram MF. 

According to Chaudhary, most large CP issuers are now listed. For investors, the listing regulations will help improve transparency in case of smaller issuers, he said. 

It is not only the secondary market transactions that have suffered, but the outstanding stock of CPs has also shrunk, indicating the difficulties faced by the companies to roll over their past CPs. 

For example, the RBI data shows that the total outstanding CP as of December 31, 2019, was Rs 4.15 trillion, down from its peak of Rs 6.40 trillion in July 31, 2018, just before the IL&FS crisis came to light.

The CP issuances have been on a downward trend ever since the markets stopped trusting CPs issued by NBFCs. But the space left by the NBFCs is slowly being taken up by other corporates, even as they are yet to drive up the volume significantly.

“The sharp drop in aggregate CP issuances is due to selective access to market by NBFCs. In the peak time, NBFC used to contribute three-fourth of the volume,” said Soumyajit Niyogi, associate director at India Ratings and Research.  “However, CP issuances by corporates both in terms of volume and number of entities have increased significantly, but their liquidity profile has to be judged properly,” Niyogi said.

According to Joydeep Sen, consultant at Phillip Capital fixed income desk, the NBFC funding challenge has crippled the entire sector, except a few leading ones. While the impact on the investors and the NBFCs themselves has been disastrous, the economic slowdown itself can be attributed to this funding challenge. 

“The funding crisis is impacting the overall business, in sectors funded by NBFCs such as auto industry. There are non-NBFC CP issuers as well, but they are not creating fresh capacities as business sentiments are down,” Sen said.