FinMin, RBI plan to put curbs on capital funds, term loans for firms

The RBI has also proposed that corporates may be encouraged to re-issue existing bonds under the same International Securities Identification Number or ISIN code.

Written by Sunny Verma | New Delhi | Published: December 26, 2015 4:42 am
capital funds, term loans, Arun Jaitley, finance minister, reserve bank of india, capital funds RBI, business news Arun Jaitley

In order to develop the corporate bond market, the finance ministry and the Reserve Bank of India are planning to restrict the amount of working capital funds and term loans that companies can borrow from banks. The ministry and the regulator plan to encourage companies to meet a portion of their funding requirements by raising funds in the corporate debt market and through commercial papers.

Another measure on the cards is to lower the transaction in corporate bonds for all category of investors, and reserve a specific portion of the bonds for retail investors, just as it is done in case of share sale during initial public offers by companies, a finance ministry official said.

Corporate bond issuance in India is currently dominated by private placements with institutions, which accounts for over 95 per cent of the total issuance of corporate debt. “We have met the RBI a number of times in recent months and discussed ways to boost the corporate bond market. A roadmap is being prepared, which will be rolled out in due course. The plan is to get companies to raise more funds through corporate bonds and to attract institutional and retail investors to participate in the market,” the official said.

The Financial Stability and Development Council, chaired by finance minister Arun Jaitley, has discussed these steps as well.

The government further plans to amend the SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act, 2002 to enable bond and debenture trustees to use provisions of this law in case of default by a corporate bond issuer.

At present, only banks and financial institutions can use the SARFAESI Act provisions in case of default. Amendments to the SARFAESI Act are being finalised and these are expected to be moved in the upcoming Budget session of the Parliament, the official said. One problem being faced in development of corporate bond market is that while the corporate loans given by banks are

not marked to market, there is a requirement of bonds to be marked to market, the

official said. This means whenever a company’s bonds rating come under pressure or there are doubts on the company’s repayment capacity, the bond investors including banks have to book mark-to-market losses in their books of accounts. In case of corporate loans, there is no such requirement of booking mark-to-market losses. The government and the RBI are trying to resolve this anomaly, the official said.

The RBI has also proposed that corporates may be encouraged to re-issue existing bonds under the same International Securities Identification Number or ISIN code. This is expected to augment market liquidity, reduce the cost of borrowings and prune the documentation requirements.

The official said that the Insolvency and Bankruptcy Code, 2015, which was introduced by the government in Parliament on Monday and later referred to a 30-member join parliamentary panel, would also help in developing the corporate bond market.

The bill aims freeing up banks’ resources for other productive uses and boosting credit markets by providing for faster liquidation of a company’s assets in case of defaults.

As per the proposed legislation, the corporate insolvency would have to be resolved within a period 180 days, extendable by a further 90 days. It also provides for fast-track resolution of corporate insolvency within
90 days.

Boost for corporate debt market

# Corporate bond issuance in India is currently dominated by private placements with institutions, which accounts for over 95% of the total issuance of corporate debt

# Only banks and financial institutions can use the SARFAESI Act provisions in case of default

# The government further plans to amend the SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act, 2002 to enable bond and debenture trustees to use provisions of this law in case of default by a corporate bond issuer

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