While the RBI governor is trying to energise the corporate bond market, he may like to know the scope for non-banking non-financial companies to issue corporate bonds. It is almost completely dried up, with the new rules for the public deposits, draft of which was unveiled by the Ministry of Corporate Affairs recently.
In the RBI’s second quarter Monetary Policy released on 29th October there were two proposals in the Mid-term policy to invigorate the bond market. One is credit enhanced bonds. The RBI will be bringing in guidelines for credit enhancements and liquidity facilities for bonds. While details will be known only after the relevant guidelines are available (no timeline laid in the Policy), it is stated that these enhancements will not be guarantees. Currently, it is possible for corporates to get a credit default swap for listed bonds or infrastructure bonds. May be the credit enhancement may come in form of credit default swap. Or it may come in form of a liquidity support to enable the repayment of corporate bonds.
The second is inflation-indexed bonds, ideally suited for retail investors. These bonds will provide a rate of return over and above inflation, and therefore, assure investors a real rate of return. Of course, these will be issued by the Govt of India – these will be national savings certificates, with inflation linkage. They do not assist the corporate sector; corporates will not even be allowed to invest. Usually, such securities do not come to the capital markets, but nevertheless, they will provide investors with an alternative mode of investing money.
The RBI also proposes to introduce cash–settled interest rate futures. The modalities of this are to be worked out by end-November, with the objective of operationalising this by end-December. This also may provide an effective interest rate risk management instrument.
However, much contrary to the RBI’s intent of encouraging the bond market, the scope for non-banking non-financial companies to issue corporate bonds is almost completely dried up, with the rules for the public deposits, draft of which was unveiled by the Ministry of Corporate Affairs recently. For those who are wondering as to why public deposit rules affect corporate bonds, it must be understood that in India, public deposits include corporate bonds too, unless the bonds fall in one of the exempted categories.
The exempted categories are now being pruned, virtually to leave no scope for non-banking non-financial companies to issue bonds at all.
The rules provide that the bonds have to be secured by first charge on assets. This itself is a sharp contrast to the international scenario. Internationally, most corporate bonds are unsecured. If the issuer had security to offer, the issuer would rather borrow money under traditional banking channels. In any case, if the issuer had to offer first charge, the issuer will surely have to seek the consensus of existing lenders, who will never grant the same as it impedes their security interest.
Another interesting instrument of corporate funding – optionally convertible bonds – has completely been guillotined, since Sahara had evidently misused the instrument. But for Sahara, which is a failure of implementation, what is wrong with optionally convertible bonds is an open question.
Non-banking finance companies are not subject to these rules – of course, they are subject to the RBI’s rules. The essence of this will be that in future, much of the incentive for bond issuance will remain limited to NBFCs. Non-financial companies will have to continue to look at NBFCs for financial support in addition to traditional limits of borrowings.
The changes in the bond market are not the only reason to set NBFCs smiling. There are several other reasons – the mid-Term Policy entitles NBFCs to join corporate debt restructuring system too. In addition, a recent amendment of the Companies Act puts NBFCs at par with banks to charge borrowers with fraud provisions, if the particulars supplied at the time of availing credit facilities were either wrong or misleading.
Indian bond market is in an extremely under-developed stage, completely inappropriate for the otherwise fledgling state of the economy. The penetration rate for corporate bonds in India, that, is corporate bonds as a percentage of total debt is only 4%, whereas China is at about 17%, not to speak of the Western markets.
Indian corporate bond market mopped up some Rs16,982 crore during financial year 2012-13. For the first 6 months of 2013-14, the number is Rs5,762 crore. If REC’s bond issuance of Rs3,440 crore is taken out, this leaves a paltry amount of only Rs1,300 odd crore, that too with only five issuers.
Vibrant bond markets are important both for the corporates as also for investors. For corporates, bonds provide an alternative to traditional banking sources. Bank money is typically comes at a floating rate of interest, and is usually short term, thereby exposing the borrower to both interest rate risk as well as liquidity risk. As opposed to this, corporate bonds may provide a long-term, fixed interest option.
As for investors, corporate bonds provide alternative to equity investments. Fixed income investments are safe, carry lesser market risk, and may provide regular income to the investors. Investors may either invest directly, or through mutual funds or other institutional investors.
During September quarter Veedol brand maker, Tide Water Oil, reported growth of 12% in its net profit at Rs14.30 crore on slowdown in sales and higher taxes
Tide Water Oil Co (India) Ltd, The lubricant manufacturer of Veedol brand, in its quarter to end-September recorded 12% growth in net profit at Rs14.30 crore from Rs12.79 crore, a same period year ago, while it reported marginal 1% increase in net sales at Rs201.71 crore compared with Rs199.60 crore a year ago period.
During September 2013 quarter, Tide Water Oil paid 33% higher taxes of Rs8.26 crore from Rs6.23 crore last year in a same period.
On Tuesday, Tide Water Oil Ltd closed marginally up at Rs7,028 on the BSE, while the benchmark S&P BSE Sensex closed 358 points up at Rs20,929.
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A short-term uptrend is likely as markets finished strongly well above the support of 6,140, mentioned yesterday.
The markets opened in the red, continuing its downtrend from yesterday. However, at 10:45 am, the markets suddenly saw volumes and volatility, shot up to 6,124 within a few seconds from 6,090—all this before Raghuram Rajan announced policy rates. Please refer to the fully story published here. After that, the bulls took control and sent the markets up through the rest of the trading session, well above the support of 6,140, mentioned yesterday.
The S&P BSE Sensex opened in the red at 20,593, then hit intra-day low in early trade at 20,493 before a stunning spike sent the market upwards. It hit an intra-day high of 20,952 before closing strong at 20,929 (up 358.73 points or 1.74%). The Nifty opened at 6,107, hit an intra-day low of 6,079 and then climbed upwards all the way to 6,228 before closing at 6,220 (up 119.80 points or 1.96%).
The breadth of the market was largely positive. Out of 935 stocks, 773 were down, 390 were up and 49 were unchanged. The volumes on the National Stock Exchange were higher, at 63.96 lakh shares compared to yesterday’s 50.25 lakh shares, underscoring the strength.
All the sectoral indices were in the green, with Bank Nifty finishing up 4.35% followed by finance which was up 3.54%.
Of the 50 stocks in the Nifty, 47 stocks advanced and 3 declined, indicating clear strength. The top five gainers were Maruti (8.75%), JP Associates (7.76%), ICICI Bank (6.26%), IndusInd Bank (5.63%) and Axis Bank (5.16%). The top losers were Ranbaxy Jindal Steel (-0.90%), ITC (-0.29%), Bharti (-0.13%).
Today’s markets were dictated by Raghuram Rajan’s decision to hike repo rates. Usually, a rate hike would send markets downwards. But here’s a catch. Investors were worried that Mr Rajan may hike the repo rate by as much as 50 basis points. This didn’t happen.
Instead, as expected, he hiked it by 25 basis percentage points, to 7.75%. The markets were relieved and went up. However, it is unclear how inflation would play out in the future as Mr Rajan continues to be worried about it.
Meanwhile, the global markets took a breather and were seen flat, with Tokyo Nikkei marginally down 0.49%. All the eyes are on the US Fed now. European markets were marginally up across all bourses. US stock futures were trading with a positive bias, with dollar firming up.