Govt mulls credit enhancements for corp bonds

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SummaryCompanies with below investment grade bonds may now be able to raise funds from insurance companies, provident funds and pension funds

Companies with below investment grade bonds may now be able to raise funds from insurance companies, provident funds and pension funds. The government is considering allowing banks to provide credit enhancements for raising the rating of corporate bonds by “maximum two notches”, thus enabling insurance companies, PFs and others to invest in them. In the long-run, the plan is to “develop an institutional mechanism for such credit enhancements,” an official told The Indian Express.

The official said market regulator Sebi along with Reserve Bank of India, insurance regulator and pension fund regulator will call a meeting of the “top four credit rating agencies soon to work out the modalities for credit rating of infrastructure projects executed by special purpose vehicles (SPVs) whereby a separate methodology for rating of the project will be examined”.

He said the credit rating of the project is likely to be based on the revenue streams accruing to the project along with standing of the promoters and sponsors of the project. The finance ministry has already written to all three regulators for examining the practice in other countries regarding the credit enhancement of bonds so that further steps can be taken, the official said.

The proposal has the full support of the finance ministry, but it has not found favour with the central bank and has partly been supported by Sebi.

Investment grade means the quality of a company’s credit. For being considered as an investment grade bond, the company has to be rated at least BBB. The rating depends on the company’s strength and its debt. The move is expected to provide funding to infrastructure projects which are more risk-prone and have huge funding needs.

Insurance companies can invest only in companies with AAA rating, restricting their options to government bonds and debt instruments of top PSUs or a few private sector firms of the country. Enhancement of credit rating by banks of less than investment grade companies will let them invest in these bonds too.

However, the central bank has argued that the credit enhancements by banks would “only be an artificial support mechanism and may not help in developing a robust market”. The finance ministry though has said the banks’ exposure to projects, based on due-diligence of projects which don’t have a track record of credit enhancement, would be a very small percentage of the project cost. But the exercise would make the

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