Calling for freer flow of funds from provident and pension funds, insurance firms and banks into corporate and infrastructure debt, India’s capital markets regulator SEBI has urged the RBI, IRDAI and PFRDA to relax investment restrictions so as to make the bond market a more functional source of finance for industry and infrastructure projects.
With banks struggling to provide long-term capital, two members of the Securities Exchange Board of India have over the past week, sought an urgent rethink on the investment norms specified by SEBI’s financial sector regulator peers for participation in the corporate bond market. This would facilitate a quicker economic recovery, they stressed.
Observing that while there were multiple players in the debt market, the number of participants in each investor class remained limited due to the current norms thereby constraining the pool of liquidity available, SEBI whole time member Ananta Barua said at a FICCI capital markets conference.
Listing out instances of restrictions that limit insurers’ exposure to private debt and infrastructure financing, he indicated that the recent permission for pension funds to invest up to 5% of their corpus in Infrastructure investment trusts (INVITs) was unlikely to work.
The Pension Fund Regulatory and Development Authority (PFRDA)’s nod, Mr. Barua said, was linked to the INVIT having a minimum ‘AA’ or equivalent credit rating for the sponsor as well as requiring a rating from two rating agencies.
“It has to be understood that INVITs’ ratings and the ability to service debt is based on cash flows of the project, and has nothing to do with the sponsor,” he said, adding that infrastructure projects were usually rated ‘BB’ or lower in the initial stages.
The RBI’s partial credit guarantee enhancement norms to help such projects get a better rating faces practical challenges, while the Centre’s plan to set up a Credit Enhancement Guarantee Corporation, announced in the Union Budget 2019, is yet to take off. The central bank’s partial credit guarantee norms cap the extent to which a bank can provide credit enhancement to 20% of the issue size.
“This means it would need at least three banks to get 50% credit enhancement (needed to move from, say, a ‘BBB’ rating to ‘AA+’ needed by insurers and PFs) and it has been difficult to get three banks to provide this for a single project,” said Mr. Barua. “Hence, there may be a need to revisit this cap,” he added.
Fellow SEBI member G. Mahalingam, speaking at an Assocham meet on financing sources, warned that relying on banks as an exclusive funding source was not going to be a positive for the economy and more steps were need from other regulators for the bond market to develop.
“I would still say that pension funds and insurance companies have to be a bit more forthcoming. There are areas where other regulators will also have to take a more pro-active role,” he said, calling for ‘a huge change in mentality’ that limits corporate bond exposures for regulated entities.
“In the RBI’s Liquidity Adjustment Facility (LAF), corporate bonds are never accepted as collaterals. It’s not legally enabled, but that is not a big problem; you have to take it to the government, come up with a good rationale and it could be done. Today, it is not accepted as part of the LAF and not even enshrined in the statutory liquidity ratio (SLR),” he said.
“We need to have a rethink. I am not saying they should take junk bonds but at least you can start off in the top-rated bonds as far as the SLR facility is concerned. Even for the liquidity service ratio, the Basel guidelines provide for AAA bonds there,” Mr. Mahalingam pointed out.