Fixed Income
Three Major Changes in Bond Market That would Create a Big Impact
The regulators in India continue to make changes to streamline the regulatory regime surrounding the Indian bond market. Lately, there has been a number of changes which is likely to cause a positive impact, which otherwise has been performing well during the last one year. There seems to be some effort from the government to push all the regulators towards a common goal. There are three changes, of which two have already come and one is expected to come, that we are bullish about, first, issue of debt securities through electronic book building mechanism, second, changes in the deposit rules for the companies to allow issuance of listed unsecured corporate bonds and third, RBI’s draft notification to allow FPIs to invest in corporate bonds. Let us discuss each of the above separately.
 
Issue of debt securities through electronic book mechanism
Securities and Exchange Board of India (SEBI) vide circular CIR/IMD/DF1/48/2016 dated on 21 April 2016 had provided a mandatory framework for issue of debt securities by private placement with an issue size excess of Rs500 crore through an electronic book mechanism (EBM). One such requirement of the circular stated that EBM shall be provided by the recognized stock exchanges after approval from SEBI. Accordingly, SEBI has granted its approval to NSE and BSE to act as EBP. By this, all the issuers of debt securities and market participants shall mandatorily make such private placement offer only through the EBM for their issuances with effect from 1 July 2016.
 
The old mechanism through which debt securities were issued on private placement basis in primary market lacked transparency. However, the EBM will enable efficient price discovery, reduction in times and cost, transparency among other things.
 
Changes in the Deposit Rules
Until recently, the Companies (Acceptance of Deposits) Rules, 2014 barred the corporates from issuing unsecured debt instruments. However, the Ministry of Corporate Affairs (MCA) vide notification dated 29 June 2016 issued the Companies (Acceptance of Deposits) Amendment Rules, 2016 (Amendment Rules) thereby providing relaxation with respect to issuance of corporate bonds.
 
The Amendment Rules has addressed this issue by excluding listed unsecured non-convertible debentures (NCDs) from the definition of deposits. Earlier, corporates, other than financial entities, were allowed to issue either secured bonds or bonds compulsorily convertible into equity within a period of five years from the date of issuance, anything apart from the said were treated as deposits. 
 
There is however a disconnect with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations 2015), which requires the maintenance of 100% asset cover for discharging the principal amount at all the times, except in case of unsecured debt securities issued by regulated financial sector entities eligible for meeting capital requirements as specified by respective regulators. Therefore, unless necessary changes are made in the Listing Regulations 2015, the non-financial entities will not be able to take the benefit of this change.
 
The situation, however, will not be any different for the financial entities, since, they were allowed issue unsecured bonds in accordance with the directives issued by their regulators.
The guidelines framed by Reserve Bank of India (RBI) allow the non-banking financial companies (NBFCs) to issue unsecured NCDs with a maturity of more than one year and with the minimum subscription amount being Rs1 crore per investor. This is why the bond market in India has been mainly dominated by the NBFCs during the last few years and the same can be viewed in the figure below.
 
 
In many of the developed countries bonds are issued without creation of security interest, subject to certain compliances, so as to enable easy raising of funds by the corporates.  Most corporates, other than NBFCs, do not have assets to create charge in favour of bond or debenture holders, as the assets are already charged in favour of banks. It is counter intuitive to expect a corporate to issue secured bonds; if the corporate had security to offer, it may be easier to access bank loans. It is when companies exhaust their security interests that they opt for bonds. Bonds are an incremental, additional source of funding, and not the first source of borrowing for most companies. 
 
Investments by Foreign Portfolio Investors (FPIs)
Another significant change that is all set to come is that the foreign portfolio investors (FPI) will now be allowed to make investments in unsecured corporate bonds and securitized debt instruments. RBI issued a draft circular on 17 June 2016 laying down new norms for FPI investments. The draft circular states that the FPIs will now be able to invest in primary issues of NCDs or bonds by public companies issued in demat form. However, the funds so raised cannot be invested for real estate activities, purchase of land, investing in capital markets or on-lending to other entities. Once put to effect, this circular can turn out to be a huge boost for the Indian capital markets. 
 
Each of the changes that we discussed in this article has come from different regulators and all of them facilitate is likely to facilitate the growth of the Indian capital markets. This entire episode can be summed to say that the heydays of the Indian capital market are soon to come.
 
(Abhirup Ghosh is a Senior Manager in Financial Services Division at Vinod Kothari Consultants Pvt Ltd. Saurabh Dugar also works in the same firm.)

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US doubts India's 7.5% growth, wants reforms to match rhetoric
Doubting India's claim of a 7.5% growth, the economic diplomacy arm of the US State Department has said that the Indian government must pursue reforms to match the rhetoric even as key bills struggle to get past parliament.
 
"Ostensibly, India is one of the fastest growing countries in the world but the depressed investor sentiment suggests the approximately 7.5% growth rate may be overstated," said the Bureau of Economic and Business Affairs in its latest report.
 
The comprehensive report took note of a range of initiatives that have been taken by the Narendra Modi government since May 2014, notably in opening up the economy to enhance Foreign Direct Investment (FDI), the "Make in India" initiative and removal of bureaucratic hurdles.
 
"However, the government has been slow to propose other economic reforms that would match its rhetoric, and many of the reforms it did propose have struggled to pass through parliament," it added in the India-related section of the report "Investment Climate Statements for 2016".
 
Giving examples, the report said the government failed to muster political support on the land acquisition bill in Parliament, all but ending its chance of passage in the near term, and still awaits the Opposition's nod in passing the Goods and Services Tax Bill (GST Bill).
 
It also had a piece of advice for those dealing with India.
 
"India's political system is highly decentralised. Investors must be prepared to face varied political and economic conditions across India's states and union territories, including differences in the quality of governance, regulation, taxation, labour relations and education levels."
 
The report said this situation has resulted in many investors backing off somewhat from their once forward-leaning support of the Bharatiya Janata Party-led government.
 
"Prime Minister Modi's courtship of multinationals to invest and 'Make in India' has not yet addressed long-standing hesitations over India's lack of effective IPR enforcement," the US Foreign Ministry report said in a reference to India's Intellectual Property Rights (IPR) regime, which has been a sore point in India-US trade relations.
 
"The Modi government has been very willing to engage in discussions with the US government and US industry on IPR in 2015," it said.
 
Last month, the World Bank retained the 7.6% growth rate projection for India in the current fiscal. The country registered a 7.6% growth rate in 2015-16.
 
The US State Department questioning of the GDP figures now adds fresh fuel to the controversy in India around calculation of the national GDP under a new methodology unveiled by the Central Statistics Office last year.
 
The report also lauded the fact that "the monetary stewardship of Raghuram Rajan, the respected Governor General of the Reserve Bank of India, further boosted investor sentiment". 
 
Rajan has announced his intent to return to academia at the end of his tenure in early September.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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Automakers expected to report moderate growth in June quarter
During the first quarter of FY2017, automobile manufacturers are likely to report a moderate growth in net profit due to lower margin trajectory, says a research report.
 
In the note, Religare Capital Markets Ltd says, during the June quarter auto companies under its coverage are expected to report a moderate growth of 32% in profit after tax (PAT) compared with about 80 to 100% growth over the past three quarters. 
 
"Only Mahindra & Mahindra (MM) and TVS Motors (TVSL) would see better margins on a quarter-on-quarter (QoQ) basis on a favourable product mix. Eicher Motors Ltd (EIM), TVSL, Ashok Leyland (AL) and MM would lead earnings growth on yearly basis aided by double-digit volume growth and better margins. Tata Motors would likely post a profit decline on yearly basis and Maruti Suzuki India (MSIL) a flattish PAT on lower volume growth and forex losses," the report says.
 
 
During the June quarter, volume growth in commercial vehicles (CV) moderated. Religare says, following a bumper March quarter, MHCVs saw a moderation in volume growth during Q1 of FY17, even as light commercial vehicle (LCV) volumes reported a gradual revival with low double-digit growth.
 
Similarly, after a strong volume growth during marriage season in April, two-wheeler reported moderate sales over next two months. "New launches continued to drive motorcycle and scooter volumes with Hero MotoCorp (HMCL) and TVSL posting 6% and 12% volume growth, respectively. While Bajaj Auto reported a 16% increase in its domestic volume, its overall sales during the June quarter declined 2% due to a 22% drop in exports. EIM's unit sales increased 38% due to a monthly rate of about 50,000 bikes in 2016," Religare said. 
 
Among the two-wheeler makers, Religare sees only TVSL to report 110 basis points (bps) growth in margin due to operating leverage and a higher proportion of moped sales. Bajaj Auto would report a 50bps margin decline due to adverse product mix, while HMCL will have flattish margins during June quarter, the research note added.
 
Religare says, among four wheelers, only MM would see margin expansion of about 150bps led by strong growth in tractor volumes, which forms 38% of the automaker's overall sales. It says, "We expect AL’s operating margins to decline 270bps QoQ (-20bps YoY) due to lower volume growth. Tata Motors, on standalone basis, is likely to post an 180bps margin decline to 6.3% and a net profit of Rs1,150 crore helped by Rs1,500 crore JLR dividends; JLR too should post a 140bps QoQ decline in margins. We build in an 80bps (-230bps YoY) margin decline QoQ for MSIL due to forex headwinds."
 
"Overall, we expect moderate PAT growth of 32% YoY in Q1FY17 (vs. 80-100% PAT growth over last three quarters YoY) for its auto universe due to a lower margin trajectory. EIM(C) should show the highest growth in PAT at 68% followed by TVSL at 48%. AL and MM would post a profit growth of 19% and 8%, respectively, Tata Motors, on cumulative basis, a 17% decline, and MSIL a meagre 3% growth due to lower margins. We continue to believe that FY17 is the year of two wheelers," Religare concluded.
 

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