What is the problem with the Indian corporate debt market?

Sebi too has pitched in to try and revive the corporate debt market. The lack of a vibrant secondary debt market has been one of the biggest cribs of the financial services industry. The primary market is not rocking, either. So, everyone from the finance ministry, the stock exchanges, RBI and Sebi have been putting on their thinking caps, trying to change things, over many years.

All the measures have not really worked wonders so far, the Sebi note admits as much while listing out the measures taken. Now Sebi has tried to go one step further and make it simpler in terms of the disclosures to be made for raising debt. These proposals make it simpler for listed companies on the equity markets to raise debt, by keeping disclosures to the minimum. Earlier, Sebi amended its regulations to allow below investment grade issuers too to raise debt capital. Will these measures really make a difference? Skeptical would be the answer.

In this whole clamour for debt market reforms, the borrowers’ cry for leniency is missing. If indeed raising debt was such a big problem, then companies would have been lobbying heavily for reform. Companies complain about taxes and infrastructure, lack of a corporate debt market is not up there among the list of problems. One really wonders if a fat prospectus is such a big deterrent. It certainly is not for the equity market.
In fact, in the mid-nineties the primary market for debt was quite vibrant, with companies raising money through public issues with both banks and companies raising money by issuing debentures and convertibles. Disclosure norms were as stringent as the equity markets, even then. Those were days when long term lending rates were usurious and public issues were economical. That created demand. Times have changed.

Now, money is cheap and can be borrowed from institutions directly. As markets modernize, it will be cheaper to raise money through a route other than from the public. That is why so many companies are going to the QIP market for follow on public equity issues. Another aspect is a general aversion to debt. After the bloodbath of the end-nineties, Indian companies have become allergic to debt. Most balance-sheets look clean with very low levels of borrowings. Paying off debt is seen as a good thing. While the traditional aversion of people to borrowing has faded in this era, corporations have become orthodox.

Companies borrow only when they have large projects that they cannot fund from internal accruals. Or, when they make large acquisitions. Here too, the preferred source of funds are overseas markets. Not only are large issues easily funded there, the cost of debt is also much lower, even after adjusting for the cost of hedging. No wonder, the external commercial borrowing market and foreign currency convertible bond (FCCBs are quasi debt, however) markets have been booming.

Whatever domestic portion is available, banks, flush with funds, are only too happy to lend. This applies to mid-sized companies as well. A mix of equity, ECBs and FCCBs are what companies have been using to raise funds. Now, Sebi’s move will hasten the process for sure, but there still remains the matter of the cost of debt. Now, that is something no one can do anything about. That alone may ensure that companies do not show much interest, at least creditworthy ones. The rest may take advantage of the relaxation, which will be a dangerous trend. Indian retail investors still think of debt as a safe haven, as long as the rate is attractive, they will come.

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