Budget 2018: Large corporates may soon have to meet at least a quarter of their funding needs through the bond market, the government said on Thursday. Moreover, the pool of investment-grade corporate bonds will now be bigger, with ‘A’ grade bonds becoming eligible for investments. The idea is to deepen the corporate bond market and nudge companies to diversify their sources of funding. Finance minister Arun Jaitley said the Reserve Bank of India has issued guidelines to nudge corporates access the bond market. “Sebi will also consider mandating, beginning with large corporates, to meet about one-fourth of their financing needs from the bond market,” Jaitley said while presenting the Budget for 2018-19. “Corporate bonds rated ‘BBB’ or equivalent are investment grade. In India, most regulators permit bonds with the ‘AA’ rating only as eligible for investment,” Jaitley said, adding, “It is now time to move from ‘AA’ to ‘A’ grade ratings.” According to rating agency ICRA, more than 80% of bond issuances come from the ‘AAA’ and ‘AA’-rated pool of corporates and the top 10 issuers account for nearly 40% of issuances. Ajay Manglunia, EVP, Edelweiss Financial Services, said the measures will help add liquidity and new players getting into the market will have a vibrant market.
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Lakshmi Iyer, chief investment officer (debt) and head – products, Kotak Mahindra Asset Management Company, said while the fine print on the proposals will have to be watched, they are directionally positive. “They are trying to diversify the sources of borrowing. By mandating a 25% quota for the bond market, you are limiting corporates’ dependence on banks and the risk associated with it.”
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The proposed measure to expand the pool of investment-grade issuers will help remove entry barriers for lower-rated corporates, Manglunia said. “Small borrowers were so far going only to banks to raise funds through the loan route and through bonds, they will always get better pricing because investors are keen to diversify their investments.” Iyer noted that investors are quite open to more borrowers entering the bond market and they would be happy to include smaller companies in their portfolio.