Rising defaults have prompted India to tighten controls on corporate bond sales, cutting back issuance in one fell swoop for a long-sought goal of expanding the market.
The supply of rupee notes has fallen to 43.8 billion rupees ($ 584 million) this month, the slowest start to a fiscal year since 2008. This is partly due to rules that went into effect on April 1 that affect the role of Strengthen asset-backed bond managers. Such offers made up about 60% of India’s total domestic issuance in the past 10 years.
Weak start
Rupee sales by Indian companies are declining due to stricter due diligence rules
Source: Bloomberg
Companies have defaulted on at least Rs 52 billion in domestic bonds so far this year, the highest record in a comparable period. That comes as a setback as Covid-19 cases have been on the rise in recent times. It also reverses last year’s trend when unprecedented stimulus measures helped slow the rate of non-repayment from a highest point ever in 2019.
What the new rules do
- Starting this month, bond trustees must and ensure that assets backing bonds are sufficient to pay interest and principal at all times.
- They must perform checks and validate that the issuer has the necessary lender consents in case the company charges further fees on the asset.
- The trustees must also provide due diligence certificates to the issuer at the time a draft agreement is filed and before the notes are listed.
What’s next
- Some bond arrangers are viewing the primary market slowdown as temporary and expect issuance to pick up as companies comply with the new regulations.
- The issuance of unsecured bonds, which are not covered by the rules, can continue. Bankers say the supply of such banknotes from public companies that often sell them must continue quickly.
- Government-controlled REC Ltd. is looking for bids for a whopping 40 billion rupees in unsecured bonds due Monday in 2024.
– With the help of Suyash Singhal
Updates the bond sales number in the second paragraph.