Rules Keeping Out Bankers May Slow Indian Bond Sales Further

(Bloomberg) -- Efforts by India's market regulator to improve price discovery of debt issuance may hit rupee bond sales that are already off to their slowest start since 2014. The reason: arrangers have been sidelined.

The new rules, which took effect April 1, have curbed bankers underwriting ability by making it compulsory for investors to bid directly for amounts exceeding 150 million rupees ($2.3 million) or 5 percent of the offer size, whichever is lower.

The move may bump up costs for issuers and make it tough for borrowers to raise funds in challenging market conditions, said Ajay Manglunia, head of fixed income at Mumbai-based Edelweiss Financial Services Ltd.

“Arrangers guide issuers on the likely demand at relevant prices, tie-up with investors and provide a commitment to borrowers,” he said. “The new rules restricts the banker's job. The corporate bond market is likely to languish.”

Companies have sold 1.29 trillion rupees of local-currency notes so far this year, 41 percent less than in the year-ago period, data compiled by Bloomberg show. A further slowdown may undermine government efforts to prod firms to tap the bond market to meet at least a quarter of their funding needs.

Here are some other concerns of market participants:

No Multiple Bidding:

• The regulator has barred bidders from submitting multiple bids
• “Multiple bidding helps better price discovery for the borrower and also helps build a larger book size,” said Jayen Shah, head of debt capital markets at IDFC Bank Ltd.
  • “Why shouldn't there be multiple price bidding for corporate notes, when it is allowed for government bonds?”
• NOTE: Multiple price bidding was allowed prior to April 1

Settlement Issues:

• Pay-in of funds has to be done via clearing corporations of exchanges, which will cause a delay in the money reaching the issuer's account
• NOTE: Earlier, payments were made directly to the issuers' bank accounts
• “Who will bear the interest loss as the fund transfer will be delayed by a day,” said Edelweiss' Manglunia

Longer Procedure:

• Borrowers must provide the term sheet to electronic book platform at least two working days prior to the open date
• Issuers also have to compulsorily announce bidding on the platform at least one working day before initiating the process
• Companies can modify bidding date and time only twice. The revision must be made during market hours and at least a day before the bidding date
• NOTE: Earlier, issuers had to file the term sheet, bidding details an hour before

“Merchant bankers may start seeking more fees to manage issuance as they will have to act like investors, which may drive costs higher for borrowers,” said IDFC's Shah. “Issuance is seen slowing down in the near term as markets get used to these norms.”

To contact the reporter on this story: Divya Patil in Mumbai at dpatil7@bloomberg.net.

To contact the editors responsible for this story: Neha D'silva at ndsilva1@bloomberg.net, Ravil Shirodkar, Chan Tien Hin

©2018 Bloomberg L.P.

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