Compulsory bonds for big borrowers a burden

The Central government is mulling over the need to tweak rules governing large corporate borrowers which came into effect from April this year.

NEW DELHI:  The Central government is mulling over the need to tweak rules governing large corporate borrowers which came into effect from April this year. The rules stipulate that borrowers with debt of over Rs 100 crore must raise 25 per cent of their annual incremental borrowings through the bond market. The rules formulated by the Securities and Exchange Board of India (SEBI) flows from a Union Budget announcement that it would “consider mandating, beginning with large corporates, to meet about one-fourth of their financing needs from the debt market.”

The problem, officials said, is that given the fact that these bonds are mostly bought by mutual funds, financial institutions and individuals; and given the number of worrying defaults in the bond market, enforcing the rule at this stage may cause more pain to bond buyers later.“The rule book talks of AA or above-rated corporates. But the problem is many AA and above rated firms have had issues… Look at IL&FS and Essel Group bonds,” said officials.

Some 10 UTI mutual funds are currently facing problems due to exposure in IL&FS group companies. UTI Banking and PSU Debt Fund saw its net asset value fall by 6.7 per cent on April 30, after marking down investments in the non-convertible debentures of an IL&FS special purpose vehicle — Jorabat Shillong Expressway Ltd.  Similarly, last month, Kotak Mutual Fund deferred ‘full redemption’ in six fixed maturity plans that held papers of two Essel subsidiaries.

“Most really good corporates will anyway try to avoid going in for bond issues as interest loan on bonds are higher, penalties are lower,” said Sanjay Bhattacharyya, former State Bank of India MD.

THE BOND RULE
The SEBI rule says that in the first two years of operations, this compulsion on floating bonds, if a large corporate wants to borrow further, will have a  “comply or explain” approach, after which the corporates which do not issue bonds to the extent demanded will be penalised. The penalty will be 0.2-0.3 per cent of the shortfall from the 25 per cent rule.