The government may want to deepen the corporate bond markets but forcing companies to source a fourth of their borrowings via bonds is not the way to go about it. After all, companies are answerable to their shareholders and treasurers should be allowed to pick up money at rates and tenures that suit their business cycles and their finances. Indeed, the SEBI directive to companies that they must raise 25% of their borrowings from the bond markets—an announcement made in the Union Budget for 2018-19—is regressive. If the government believes this is one way of protecting banks from over-lending to the wrong borrowers, it needs to tighten the prudential guidelines. This paper has been arguing that it was RBI’s very lenient rules on lending to groups and companies that was responsible for the large loan losses. But micro-managing companies could put their finances at risk; it is possible firms will mop up money at unnecessarily high rates. The fact is that, while the bond markets might seem liquid, they are not; in the three months to June for instance, very few companies were able to raise money since investors were demanding high yields at a time when liquidity was less than abundant. The outstanding value of corporate bonds is some `28 lakh crore but many of the long term investors—provident funds and insurers—typically hold their investments till maturity and are unwilling to trade.
There is also the matter of safety: The fact is the track record of rating agencies has been exceptionally poor and they have rarely been able to red-flag trouble at distressed companies. The latest example of this is IL&FS where the rating agencies could not spot the problems in time and warn investors. It is best to let companies pick their lenders and investors, else dubious practices will surface and, in the process, investors will suffer and so will the markets. It would be undesirable to hurt a growing market because that would spook deep-pocketed buyers such as foreign portfolio investors (FPI). Any market should be allowed to run on demand and supply—at 51% in 2016-17, the share of the bond market in financing companies was larger than that of the banks. This suggests that the markets don’t need to be propped up.
The government should try and broaden the bond markets—it may want to allow institutional investors to invest in paper that is rated below AA. Even lower-rated companies can, at times, make for reasonably safe investments. But forcing companies to tap the bond markets and penalising them if they don’t is not a good idea. The rules should be rolled back.