India’s securities regulator wants to develop India’s corporate bond market — so it has ordered large companies to raise at least 25% of their long-term debt from bond sales

• The SEBI has ordered large companies to raise at least 25% of their long-term debt through the sale of commercial paper in a bid to diversify the bond market, which is dominated by the sale of government bonds.
  
• The new law, effective starting 1 April next year, was originally outlined by Finance Minister Arun Jaitley when he presented the government’s Union Budget in February 2018.
  
• Not only will the law boost the number of corporate bond issuances but it will also reduce the reliance of large companies on Indian banks, which have become more cautious about lending after the build-up of non-performing loans.

The Securities and Exchange Board of India (SEBI) just released a circular with significant implications for India’s bond market.

The national securities regulator has ordered “large” or publicly-listed companies to raise at least 25% of their long-term debt through the sale of commercial paper in a bid to diversify the bond market, which is dominated by the sale of government bonds.

The new law, effective starting 1 April next year, follows a push from India’s finance ministry. It was originally outlined by Finance Minister Arun Jaitley when he presented the government’s Union Budget in February 2018.

The rule also has a punitive component as the SEBI intends to fine companies 0.2% of the shortfall in borrowing in the event of non-compliance. To avoid the fine, companies will have to submit a formal explanation to the stock exchange it is listed on, detailing the reasons for the shortfall.

For the purposes of this rule, large companies are defined as entities with outstanding long-term debts of more than ₹1 billion and a credit rating of ‘AA’ or above.

The credit rating clause is particularly important as companies that are having a tough time servicing their existing debt obligations or have seen their credit profile deteriorate will be excluded from the requirement. Even scheduled commercial banks are exempt from the law.

The law could eventually be applied to companies with lower ratings. However, by including the ‘AA’ credit rating requirement, SEBI is lowering the risk of defaults on corporate bonds. It also ensures that there will be adequate demand for commercial paper.

The development of India’s bond market has been a priority for India’s government for a while.

Not only does the law reduce the reliance of large companies on Indian banks, which have become more cautious about lending owing to a build-up in non-performing loans, but it will also enable the long-term financing of critical projects in the infrastructure sector amid the ongoing liquidity crisis. As a result, banks will be tapped less for long-term funds and more for short-term working capital loans, which are deemed as safer.


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