The limit imposed on the number of international securities identification number (ISIN), that can mature in a financial year, for private placements may drive up yields. The cap on ISINs was placed via a recent circular from the Sebi. It allowed a maximum of 17 ISINs maturing in any fiscal. Of this, a maximum of 12 ISINs maturing per fiscal shall be allowed only for plain vanilla debt securities. The regulator is attempting to address liquidity in the bond markets, say market experts. previously, each time an issuer placed a new bond, secondary trading in the previous security reduced. With fewer number of ISINs issued by a company every year, activity will automatically increase in the secondary market. However, issuers and market experts have new causes of concern. They point out that there are companies, especially NBFCs — for whom money is a raw material — that approach the market very frequently. These companies tap the market a number of times every year and raise funds in smaller quantums. They wait to see whether the rates are conducive, whether they require so much money at that point in time or whether a rate cut by the central bank is on the cards.
According to some estimates, leading issuers in the debt market end up issuing anywhere between 20 and 25 ISINs per year.
Under the new rule, it is clear that they cannot have more than 12 ISINs maturing in one financial year for plain vanilla debt instruments. If that is the case they have two options. First is that they can raise huge amounts of money in a single issuance so as to optimally utilise the permitted number of ISINs every year. However, this may push up the borrowing costs because yields tend to go higher when any issuer wants to do a large quantum deal. A yield on a 10-year AAA-rated paper might be different when an issuer wants to raise `200 crore than if it wants to raise `2,000 crore. “After the new regulation, issuers, especially NBFC issuers, will have to do larger quantum issues at one go. As a result, there is a likelihood that investors may ask for a higher yield when an issuer looks to raise a larger quantum,” says Ashish Jalan, assistant vice-president, SPA Securities.
The other option is to raise funds by re-issuing bonds with the same ISIN. In this case, bunching up of liablities may be a cause of concern — companies may end up facing huge redemptions in a given financial year.
It is true that the regulator has given the option of different type of payment options to different category of investors. “For example, an insurance company may be offered staggered redemption, however mutual fund may be offered bullet payment,” the Sebi circular points out. However, market experts are unsure whether it be practically viable to manage both types of payment methods under a single ISIN.
“We do not normally see a structure where a staggered and a bullet payment are on the same ISIN. We will have to see how this works out,” said a market expert. Issuers are also confused about whether the already conducted issuances in the financial year will be exempted or not.