Small firms can access bond markets
The Centre has proposed new entry rules in the corporate bond market by relaxing the definition of listed companies, which will ease the compliance burden on the smaller companies.
Both the Centre and the regulators are taking various measures to push corporate bond issues because of the limited funding sources of the private sector.
India’s corporate debt market has been growing over the past few years in terms of the number of issues, but the market remains undeveloped accounting for just four per cent of the country’s gross domestic product. The investor base is limited and the liquidity of bonds that are not top rated is inadequate.
Private placements of debt remain the preferred route to raise debt for companies compared with public bond issues. In 2019-20, companies raised Rs 6.75 lakh crore debt in private placement against Rs 6.10 lakh crore a year ago. They raised just Rs 14,984 crore through public issues of bonds in 2019-20 against Rs 36,679 crore in the previous year. Public issues slowed down during the fiscal because of liquidity concerns post IL&FS default and the stretched balance sheets of a few companies in 2019-20.
Companies have raised Rs 6.32 lakh crore in private placement till January in this ficsal, while the public issue of corporate debt stands at around Rs 9,119 crore.
The ministry of corporate affairs on Friday took a major step towards easing the compliance burden on companies planning to issue corporate bonds from April. It inserted Rule 2A in the Companies (specification of definitions details) Rules, 2014.
Rule 2A says companies who have not listed their equity shares on the stock exchanges but have listed privately placed non-convertible debt or non-convertible redeemable preference shares in line with Sebi norms will not be considered as listed companies. It will also apply to companies who are not listed in India but listed overseas in specified jurisdictions.
Unlisted companies keen to tap the bond market will get a major relief from the amendment. Previously, even if the parent was unlisted, the companies had to follow the same rules as applicable to the listed equity companies in terms of Sebi's Listing Obligations and Disclosure Requirements Regulations 2015 or the LODR norms. Since these placed various compliance requirements on them, companies particularly the smaller ones were hesitant to approach the debt markets.
Speaking to The Telegraph, Madhurima Mukherjee Saha, senior consultant, J. Sagar Associates, said the compliance rules discouraged small companies from accessing the bond markets. This could now change because of the amendment.
“Unlisted public companies, with debt or preference shares listed were counted as listed companies and fell within the rigorous compliance scanner under the Sebi LODR Regulations, 2015, and under the Companies Act. The move to liberalise the definition of listed companies will give the deserved impetus to the bond market, when the economy will be emerging slowly out of the post-Covid era,’’ she said.
She said small companies and start-ups could access a wider pool of creditors without burdening themselves with greater compliance and costs.
Analysts said the compliance rules led to additional costs on smaller companies. For instance, they had to abide by the Securities and Exchange Board of India (Sebi) rules on the appointment of directors.
“The rules notified relaxes provisions for public/private companies, whose debt was listed (and equity is not listed) on the stock exchange which includes appointment of woman director, independent director, secretarial audit etc which were applicable to every listed entities (debt or equity),” Makarand Joshi, partner, MMJC and Associates LLP — a corporate compliance company said.
“In fact, it has gone a step ahead to relax any Indian company which chooses to get its equity listed overseas and absolve them from the regulations as a listed company under Companies Act, 2013. Companies like Jio, if its prefer to list overseas, will also be benefited from this amendment," Joshi said.
The MCA's step comes just days after finance minister Nirmala Sitharaman revised the definition of small companies under the Companies Act, 2013. In the Union budget, Sitharaman, increased their thresholds for paid-up capital from not exceeding Rs 50 lakh to not exceeding Rs 2 crore and turnover from not exceeding Rs 2 crore to not exceeding Rs 20 crore. The finance minister had said that this would benefit more than two lakh companies by easing their compliance requirements.