Debt rating may raise borrowing cost

MUMBAI, March 27: The Securities amp; Exchange Board of India's decision to make it mandatory for all debt instruments, irrespective of the...

MUMBAI, March 27: The Securities amp; Exchange Board of India8217;s decision to make it mandatory for all debt instruments, irrespective of their tenure, to be rated, is expected to increase the cost of debt of weaker companies. These companies, which resorted to the issue of debt instruments with a tenure of less than 18 months in order to avoid getting themselves rated, will now have to compulsorily have their instruments rated. However, weak financials and bleak business prospects would ensure low ratings for their instruments which in turn would make it more expensive to raise debt.

Sebi, at its board meeting on Friday, decided to make it mandatory for all debt instruments, irrespective of their tenure, to be rated. Sebi chairman DR Mehta said that the purpose of this move was to prevent some NBFCs which were converting FDs into debentures from working around the recent Reserve Bank of India directive announced on January 2.

A number of NBFCs which had been converting their fixed deposits FDs intonon-convertible debentures NCDs with a tenure of less than 18 months will not have it easy anymore. With their financials under severe strain and the prospects of the industry looking bleak, NBFCs have shied away from long-term debt instruments in order to avoid getting lower ratings. The RBI announced a new set of directives for NBFCs in January which severely restricted their access to public deposits.

According to the RBI directives in force, NBFCs with a triple-A rating can raise only four times their net-owned funds NOF while companies with double-A ratings can raise public deposits only 2.5 times their NOF. Single-A rated companies can raise deposits 1.5 times their NOF while companies whose ratings are at the investment grade level can raise public deposits equal to half their NOF.

The central bank, while announcing the new directives for NBFCs, said that unsecured debentures issued to other companies, banks and financial institutions will not fall under the category of public deposits. quot;Thishas prompted a number of NBFCs to convert a large portion of their FDs that have matured into short-term NCDs which are again parked in fresh short-term NCDs upon their maturity,quot; said an industry source.

quot;A lot of companies have been issuing NCDs of less than 18 months tenure in order to bypass the existing guidelines,quot; said Crisil managing director Ravi Mohan.