Mumbai, Dec. 3: Companies in India will now be able to float junk bonds.

The Securities and Exchange Board of India (Sebi) today relaxed rules to permit companies to float corporate bonds that are billed by credit rating agencies as sub-investment grade.

The move is designed to allow more companies to access the corporate debt market at a time when they are finding it harder to raise loans abroad. Over the past couple of months, the regulator has tightened norms for external commercial borrowings in response to a riding tide of dollar inflows.

The regulator today removed a condition in the Sebi (Disclosure and Investor Protection) Guidelines, 2000 that permitted the issue of debt instruments that were rated as investment grade.

In a disclosure-based regime, Sebi felt it should be left to the investor to decide whether or not to invest in a non-investment grade debt instrument.

“Given this, and in order to develop market for debt instruments, it has been decided to allow bonds which are below investment grade to the public to suit the risk/return appetite of investors,” the regulator said in a note.

Bond market observers were sceptical about the move since investors in India tend to be averse to risk. They felt that the move might encourage more companies to seek a credit rating for their debt paper and then decide whether to test the market for junk bonds.

Recently, Haryana Vidyut Prasheran became one of the first companies to accept a non-investment rating. Crisil ratings below BBB- are considered non-investment grade.

“At present, investors are not keen on such issues due to the risks associated with them despite high yields that they will have to offer,” says an expert.

Credit ratings

Sebi has also scrapped the condition that required bond issuers to obtain credit ratings from two entities.

At present, the Sebi guidelines stipulate that companies planning to come out with public or rights issues of debt instruments must obtain credit ratings from not less than two agencies.

The market regulator said that to reduce the cost of issuance of debt instruments, henceforth a rating from one credit rating agency would be sufficient.

The regulator also removed the structural restrictions on debt instruments such as those on maturity, put/call option on conversion, to give issuers the “desired flexibility in structuring of instruments to suit their requirements.”

Analysts said that no put or call option was available at present in debt instruments that carry a convertible clause.

Sebi said the rules, which will come into place with immediate effect, were aimed at facilitating a vibrant primary market for corporate bonds in India.

The market regulator has been taking various steps to inject more life into the corporate bond market.

Barring highly rated corporate houses who have had some degree of success in this market, many prefer to raise money through other means that include tapping the overseas market.