The latest relaxations in commercial paper (CP) issuances with lower minimum ticket size and lower/dual ratings will provide additional comfort to investors, says a report.
“The recent RBI draft on mandating dual ratings for CPs and limiting use of CP funds for current assets and operating expenses, will provide additional comfort to investors given the unsecured nature of the instrument and its increasing share in the issuers’ financing mix,” Icra senior vice-president Karthik Srinivasan said in a note today.
The outstanding CP stock has increased to Rs 3.61 trillion as of end December 2016 from Rs 2.60 trillion as of end March 2016 and Rs 1.93 trillion as of March 2015, he said.
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While debt issuance volume on private placement basis have increased significantly from Rs 1.18 trillion across 744 issues in 2007-08 to Rs 4.78 trillion across 2,662 issues in the first nine months of the current financial year, the average issuance size remains modest at around Rs 180 crore, Srinivasan added.
On February 2, Reserve Bank relaxed CP issuance norm by lowering the minimum credit rating to A3 from A2 as well as the ticket size from Rs 10 lakh to Rs 6 lakh.
“CP shall be issued in minimum denomination of Rs 5 lakh and multiple of Rs 1 lakh… the minimum credit rating for a CP shall be ‘A3′ as per rating symbol and definition prescribed by Sebi,” the RBI said in a new notification under the Commercial Paper Directions 2017.
It can be noted that the earlier rating was A2, while the minimum ticket size was pegged at Rs 10 lakh.
Debt capital markets has been growing at a faster clip than bank credit which in fact has been steeply declining of later with the continuing push by the RBI and Sebi.
The report also said the new measures will increase the compliance burden on the issuers and thus will go a long way to deepen the debt capital markets.
Though investor appetite is low for CPs rated below A1+, removal of minimum networth criterion can broaden the market. One of the concerns for lower rated papers has been the unavailability of adequate information on the issuers. Over the past two years, CPs have become an important source of funds for borrowers given the wedge between the rates in the CP markets and the banks’ lending rates.
Srinivasan said adequate banking liquidity coupled with continued inflows into the key investor segments like mutual funds and insurance will continue to keep the interest in CP market at elevated levels.
Another important step at the same time is Sebi’s consultative paper on consolidation and reissuance of debt securities issued on private placement basis.
The Sebi paper aims at consolidation of various ISINs of the issuers having similar maturities through various process including buyback and reissuance or future issuances under same ISINs (international securities identification numbers) at premium or discount to face value.
“This is expected to increase the floating stock of securities under a given ISIN, which will aid the liquidity in secondary market.
“While the onus of consolidation of securities remains on the issuers, the proposal to cap the number of ISINs for debt securities which can be issued by an issuer in a year, may force issuers to opt for consolidation of their debt securities. If successful, the step can lower the borrowing costs for issuers as secondary liquidity improves resulting in better price discovery,” he added.
Better price discovery can also lead to strengthening the foundation for new products like credit default swaps for the companies and will make the debt market more vibrant, he added.