Sebi mulls rejig to rupee bonds with online disclosure plan

So far this year, a total of 204 deals worth of $20.3bn have been issued in the rupee corporate bond market, according to Dealogic. But of this, not a single one was a public issue. Instead, they were all privately placed. In the same period last year, public notes accounted for at least 10% of the new issuance.

This is largely due to problems plaguing India’s debt capital markets. Institutional investors have tended to shun investing in the nascent local market, and due to a lack of liquidity, corporates are forced to print smaller sizes, say bankers. This, in turn, forces domestic investors to buy a large portion of these bonds to get a meaningful holding, adding to the lack of liquidity.

Notes end up pricing at levels determined by the shortage of supply rather than the issuer’s credit fundamentals. This means that bonds are usually sold only to a few accounts making it more like a private placement market.

In a bid to break away from this vicious cycle, Sebi is keen to overhaul its bond market to decrease the opaqueness around transactions.

“A meeting of the Corporate Bonds and Securitization Advisory Committee (CoBoSAC) of Sebi was held on July 29, wherein the committee deliberated on the introduction of primary market debt offering through private placement on electronic platform,” an official at Sebi said in an email to GlobalCapital Asia. “In the said meeting, the committee recommended Sebi to initiate a consultation process on the subject matter.”

It’s not yet clear what information would be made public on the electronic platform or the timeline for implementation. But market participants generally agree that they would see more disclosures by corporate issuers, including details on coupon and fees — something missing at the moment.

Though all issuers have to file information about their upcoming deals on the National Stock Exchange or Bombay Stock Exchange websites to get a green light from Sebi, this information is, at best, basic.

“Most bond issuances in India are private placements where the issuer gives only basic information to the exchange such as the issue size, and offers are made to FIGs and other investors, including high net worth investors, who are invited to give indicative bids to lead arrangers,” said Ashwini Tewari, regional head of east Asia at State Bank of India. “Therefore, there is a certain lack of transparency in terms of coupons and fees paid to the arrangers.”

He added that corporates prefer this system as it is flexible and cheaper compared to a public issue, which requires more paper work and higher legal costs.

“So if this online issuance comes about, it should be good provided costs are kept in check,” he added. “Though it’s hard to guess what kind of information would be made accessible online, it should surely include information on indicative coupon to be paid."

Some DCM bankers are also hoping for more clarity on fees.

“In general bankers don’t like their fees disclosed but whether onshore or offshore bonds, I think it’s needed,” one Hong Kong-based DCM banker said.

“Indian state-owned borrowers pay almost nothing other than basic expenses to banks on their deals, but banks still competitively go after these deals to boost their league table rankings. This trade-off should be changed if India is serious about bringing its capital markets to a more advanced level.”

Sebi’s plan, if it comes to fruition, will only apply to onshore corporate debt, as guidelines for offshore notes are handled by the Reserve Bank of India (RBI). However, market observers expect that changing rules domestically would positively affect sentiment surrounding India’s capital markets.

“[The changes] might not come cheap for us as an issuer, but this is definitely the way to go for the long term,” said a treasury official at an Indian company that regularly issues bonds onshore and offshore.

“The Indian fixed income market is not as deep and mature as the government wants it to be. Its regulators have tweaked and pruned regulations to woo foreign investors but I think what’s equally, if not more, important is the psychological assurance that the government is serious about reforms, especially so for [emerging market] countries like India.”

Indian bankers are hoping more transparency about how bonds are executed and priced would attract foreign investors who have been staying away from the rupee market.

According to SBI’s Tewari, only 77% of the investment ceiling for Indian corporate bonds from foreign institutional investors (FIIs) had been used as of August 11. It had almost reached the limit for government securities.

“In addition to higher yields on Indian onshore bonds and government securities, the relative stability of Indian rupee compared to other EM currencies is the attraction factor for FIIs,” he said.