India Inc opts for debt market funding

• HDFC
• 07 Aug 2018
• Knowledge Centre

HDFC, Tester

In recent months, India Inc has opted to choose the debt market route for garnering funds, looking to borrow before the central bank increases rates further. Companies like Reliance Industries, Tata Steel, Idea Cellular, PNB Housing, Shriram Transport, Can Fin Housing, Vedanta and Indiabulls Real Estate, among others, are already on the move and will raise ~Rs 75,000 crore through non-convertible debentures (NCD). Reliance Industries plans to raise Rs 20,000 crore, and Tata Steel is looking at garnering Rs 12,000 crore via the NCD route.

 

Other companies that have opted for the debt route are PNB Housing Finance and Shriram Transport Finance, to name a few. The former will raise up to Rs 10,000 crore by issuing bonds through a public issue, and the latter has proposed to raise Rs 5,000 crore through NCDs. Other companies in the fray include the ECL Finance, the non-banking arm of the Edelweiss group where the issue has already closed, and realty firm Sobha Ltd that plans to raise up to Rs 700 crore through the issue of debentures to meet its funding requirements for the execution of real estate projects.

 

Playing Safe

 

According to experts, the Reserve Bank of India (RBI) hiked the interest rates after maintaining a status quo for four years. This signals the start of a rate-tightening cycle. There are concerns that the central bank will hike interest rates twice in the remaining monetary policy reviews this year. This is expected to lead to cut-throat competition amongst companies, with each looking at attracting more investors with higher interest rates.

 

This scenario will definitely be beneficial for investors. Several NCDs and company FDs are now coming in at attractive interest rates, and this trend is expected to continue further on. Investors are expected to have a vast array of options to choose from.

 

For example, the public issue of 10-year NCDs from AA+ rated Shriram Transport Finance offers 9.5%, while fixed deposits from corporate houses such as Bajaj Finance, Mahindra Finance, and DHFL offer 7.5% and 8.6%, with lower tenures of 1 year and 2 years, respectively.

 

A volatile secondary market has also prompted companies to opt for the debt route. This is encouraging investors to diversify their portfolio, and debt instruments offer capital protection as well as assured returns. Another factor that has contributed to this move towards debt is RBI’s new norms. These measures are aimed at lowering the threat of high exposure of the banking system to any single borrower. The central bank has brought in these prudential norms, prompting borrowers to tap the bond market to raise funds.

 

Other Factors

 

According to a Prime Database report, between January 2018 and June 2018, India Inc raised ~Rs 2.45 lakh crore through bonds and debentures. The scenario for QIPs looks bleak, with 22 companies raising only Rs 13,188 crore, as compared to Rs 56,152 crore in the previous year.

 

As things stand now, the debt route seems to be the most attractive for companies to raise funds. Going ahead, the return of stability to the equity market could be a game-changer.