Public Issue Of NCDs Slow As Regulatory Environment Tightens

The public issue for non-convertible debentures has become an unintended casualty of the heightened regulatory environment, five people told NDTV Profit.

Securities and Exchange Board of India’s regulatory action against two merchant bankers and the Reserve Bank of India’s scrutiny over higher pace of growth by non-banking finance companies has slowed the pace of debt public issuances in the market.

Indian companies borrowed Rs 5,526 crore through the public issue in April-October, 59% lower from Rs 13,478 crore raised in the year-ago period, according to SEBI data.

In a public issue, companies can borrow funds by offering debt securities for subscription by general public, as against private placement which entails issuance of securities to select few entities, largely institutional investors.

The slowdown has come after SEBI, in March, barred JM Financial Ltd. from conducting debt merchant banking business after it found serious regulatory lapses during an instance where the company acted as a lead manager for a public issue.

"SEBI’s action on barring a lead merchant banker from accepting fresh mandates related to public debt issuance has impacted market sentiment and possibly delayed some planned issuances," said Venkatkrishnan Srinivasan, founder at Rockfort Fincap.

In September, SEBI had prohibited Axis Capital from undertaking new debt merchant banking business, as it allegedly violated regulations for an NCD issue by Sojo Infotel.

Calls and email sent to JM Financial and Axis Capital were unanswered at the time of publishing this story.

Usually, non-banking finance companies, financial services and housing finance companies tap the public issue market. It has been the case this year as well, with companies rated 'AA' or lower.

The RBI’s crackdown on lenders for growing “too soon too fast” is another factor for a fall in public issuances, another person said. The constant warning to curb sharply rising credit growth has led to a slowdown in disbursements.

“There is a slowdown in disbursements for NBFCs, so funding requirement is also less. Incrementally, looks like it (public issuances) won’t rise much from here on,” said Anil Gupta, vice president and co group head financial sector ratings at ICRA.

It is important to note that after the RBI increased risk weights on banks and NBFCs in November 2023, market participants had expected debt public issuances to rise, as most NBFCs were expected to have flocked to the market to diversify their borrowing.

This is evident in the funding mix of NBFCs that have changed, as bank lending to NBFCs has fallen to 6.4% on year growth in October from 18.3% on year in the same period a year ago, according to RBI data.

However, the ban on frequent issuers, such as IIFL Finance may have left a gap in the debt public issue market, the person said.

Earlier this year, RBI barred IIFL Finance from conducting gold loan operations because of serious regulatory lapses. While it has now allowed the lender to resume operations, IIFL Finance remained absent from the market.

Edelweiss Financial Services, Muthoot Fincorp, Muthoot Mercantile, IIFL Samasta Finance, NIDO Home Finance were among the major issuers which tapped the public issue route so far in the current financial year.

The fall in public issuances has also been accompanied by a broad-based increase in bond placements.

In April-October, fundraising through private placement of debt rose to Rs 6 lakh crore as against Rs 5 lakh crore borrowed in the same period a year ago.

In a public issue, bonds are typically offered with a preset coupon rate. The fall in public issuances could also be because of the fact that borrowers typically have to shell out higher coupons through this route, relative to private placements.

However, public issuances prove to be cost-effective for raising larger amounts of capital, the people said.

Further, SEBI’s directive to cut the face value of privately placed bonds to Rs 10,000, subject to the appointment of a merchant banker, has made the private placement route more accessible and attractive for issuers, Srinivasan said.

"This gives issuers the flexibility to structure bonds at either Rs 10,000 or Rs 1 lakh, which can possibly divert interest away from public issuance," he said.

The rise in online bond platforms have also led to a fall in public issuances, according to Gupta.

Lack of large issuers because of higher regulatory and compliance costs as compared to private placements has also weighed, Srinivasan said.