Corporate Bond reissuance fails to gain traction

With banks reluctant to cut lending rates, borrowers have been looking other instruments to raise money. Companies have been preferring corporate bonds over borrowing from banks, April - July data indicates. In the period, companies have raised nearly Rs 2 lakh crore using corporate bonds. 

The considerable rise in issuance of corporate bonds is also a result of the measures taken by the Reserve Bank of India (RBI), market regulator Securities and Exchange Board of India (Sebi) and the government.

In a recent working group report on corporate bonds, the RBI said, while the primary corporate bonds market is robust, the performance of the secondary market is dwindling, with only limited trades seen there. 

Sebi recently allowed corporates to reissue bonds, but there has not been any reissue of bonds by any corporates, RBI said.

According to the report, the total corporate bond issuance grew by around 236% to Rs 4.14 lakh crore in 2014-15 versus Rs 1.75 lakh crore in 2008-09, the recession period.

In volume terms, the bond issuance has also improved by almost 153% to 2,636 issuances in 2014-15 from the 1,042 seen in the recession period.

But in the secondary market, the trading for these bonds have been continuously limited at around Rs 2,000 crore per day.

RBI said, the "Lack of trading volume is non-availability of sufficient floating stock for each International securities Identification Number (ISIN) as corporates have preferred fresh issuance rather than going for reissuance of bonds."

Simply put, with every new issuance from the same issuer is provided with a separate ISIN, which then makes the older bond in the same maturity period, illiquid.

The RBI says that this can be resolved by the reissuance of the same issue for a particular maturity, similar to government securities, which can help maintain liquidity.

Sebi steps don't yield results

To make reissuance more attractive, Sebi had done away with the stamp duty and also rejected a proposal to mandate corporates to reissue bonds beyond the Rs 500 crore-a-quarter threshold.

Stamp duty is an important element in the cost of the issue of bonds. Apart from this, now there are no requirements to file an offer or any other document with the regulator, for the purpose of re-issuance too. 

One of the main concerns keeping corporates at bay, remains bunching of repayment liabilities.

"Despite Sebi allowing reissuances by the corporates, there has not been any reissue of bonds by any corporate due to the liability problem."

Same ISIN code for reissuance

To resolve the liquidity problem, it's imperative for corporates opting for such bonds to re-issue the existing bonds under the same ISIN Code. 

There are some reservations about having common ISINs. These include, concerns over the creation of a cluster of liabilities on the same date which is expected to lead into an asset-liability mismatch. 

However, this can be resolved by spreading out the redemption amount across the year through amortising the payments, RBI said. 

RBI also suggested that the issuers should be encouraged to consolidate their various existing issues into a few large issues which can then serve as benchmarks. Such a case would support firms in terms of reduction in the cost of borrowings.

Companies which list only debt securities but not equity are treated as listed companies under the Companies Act and are governed by the corporate governance obligations applicable to listed companies. This is seen as a disincentive to smaller issuers to list their bond issuances.

The corporate governance norms applicable to companies which have listed only debt securities and not equity may be reviewed by RBI so as to make them less inconvenient.