Banks have been the primary financiers of the infrastructure sector in the country, supported by the equity market. The domestic debt market is dominated by government securities with the penetration of corporate bonds at a low of about 14 per cent of GDP. However, the situation has started to change with a deepening and widening of the nascent corporate bond market, following the introduction of reforms by the Reserve Bank of India (RBI) in August 2016. Moreover, volatility and weak sentiments in the equity market, as well as lower costs of debt (due to falling interest rates) have increased public and private bond issuances recently.
Recent issuances
Corporate bonds: During the past year, activity in the corporate bond market picked up, as a number of infrastructure players tapped this route. Companies such as Tata Power, Reliance Jio Infocomm Limited, Adani Ports and Special Economic Zone Limited, Tata Power Renewable Energy Limited and Great Eastern Shipping Company raised over Rs 75 billion via bond issues.
Masala bonds: In July 2016, the Housing Development Finance Corporation (HDFC) became the first Indian company to issue masala bonds. It raised Rs 30 billion through the issuance of unsecured rupee-denominated bonds which were oversubscribed by 4.3 times. So far, HDFC has made four such issuances worth around Rs 50 billion. This was followed by Adani Transmission Limited’s issue of Rs 5 billion via rupee-denominated bonds.
Green bonds: Green bonds are gaining traction due to the focus of corporates shifting towards renewable energy. So far, some of the players including IDBI Bank, Hero Future Energies, Axis Bank, and ReNew Power Ventures have raised over Rs 120 billion. Another instrument, green masala bonds, is being issued to tap the offshore bond market. One such issuance was in August 2016 by NTPC Limited whereby it raised Rs 20 billion through rupee-denominated green masala bonds.
Infrastructure bonds: RBI had allowed banks to issue long-term infrastructure bonds over two years ago to ensure the flow of funds to credit-starved sectors. Banks such as IDBI Bank, ICICI Bank, HDFC Bank and YES Bank have raised around Rs 141.65 billion so far. HDFC Bank mopped up the highest amount of Rs 67 billion.
The government has permitted six organisations (the National Highways Authority of India [NHAI], the Power Finance Corporation, the Rural Electrification Corporation, the Indian Re-newable Energy Development Agency [IREDA], the National Bank for Agriculture and Rural Development and the Inland Water Authority of India) to raise a total of Rs 313 billion through tax-free bonds in 2016-17. In November 2016, NHAI raised Rs 100 billion through this route. So far, credit-enhanced bonds have been issued by CLP India, Hindustan Power Projects, and ReNew Power.
Policy measures
Traditionally, bonds have not been a popular source of funds for infrastructure companies due to a number of factors such as stamp duty issues, a low investor base, tight liquidity in the secondary market, and a preference for government debt, among others. However, as bank credit, the largest source of debt, is facing capital constraints under Basel III norms and is nearing sectoral limits, bond issuances by infrastructure companies are picking up, supported by several enabling measures recently introduced by RBI.
Corporate bond market: Foreign portfolio investors (FPIs) have been allowed to transact in corporate bonds directly without involving brokers. In addition, brokers authorised as market makers have been allowed to participate in the corporate bond repo market.
Commercial banks allowed issue of masala bonds: Commercial banks have been allowed to issue masala bonds to increase their capital base and to finance infrastructure/affordable housing projects. The borrowing by banks for infrastructure financing will still have to be within the overall limit of foreign investment in corporate bonds, which is pegged at Rs 2.44 trillion at present.
Limit of partial credit guarantee enhanced: The aggregate partial credit enhancement (PCE) that will be provided by the financial system for a given bond issue has been increased from the present 20 per cent to 50 per cent of the bond issue size, subject to the PCE provided by any single bank not exceeding 20 per cent of the bond issue size and extant exposure limits.
Reduction in banks’ loan exposure: In a bid to reduce the concentration risk in the banking sector, RBI recently capped banks’ loan exposure to a company or a group to 20 per cent and 25 per cent respectively. Due to this, more infrastructure companies are likely to tap the bond market for raising funds. While major and highly rated companies may be able to transition smoothly, financially stressed groups may find the cost of migration disproportionate due to being highly leveraged and having a lower credit rating. However, in the long term, the apex bank’s move bodes well for the deepening of the bond market.
Cross-holding of bonds permitted: In order to encourage the issue of long-term bonds for financing infrastructure projects and affordable housing, RBI permitted banks to invest in long-term bonds issued by other banks. Such issuances are exempt from meeting the manda-tory cash reserve ratio and statutory liquidity ratio requirements.
Credit Enhancement Fund: The Indian Infrastructure Finance Company Limited-anchored Rs 5 billion Credit Enhancement Fund, announced in the Union Budget 2016-17, is likely to be operationalised soon. The Life Insurance Corporation of India will act as one of the partners for the fund, which will provide guarantees to lower-rated bonds issued by infrastructure companies and bolster their ratings. This will help firms to raise money at lower interest rates.
Listing norms for green bonds: In January 2016, the Securities and Exchange Board of India (SEBI) approved new norms for the issuance and listing of green bonds in the stock market. As per the new norms, companies issuing green bonds will have to make additional disclosures related to the end-use of proceeds, project evaluation and selection, and the management of proceeds, and report the use of proceeds on an annual basis.
Outlook
Going forward, bond issues from new sources are expected to emerge. About 60 municipalities in the country are expected to issue bonds to fund smart city projects. Besides, the newly established New Development Bank is planning to issue rupee bonds for financing infrastructure projects in the country. While the recent developments in the bond market bode well, long-pending issues and challenges must be resolved. These include the taxation structure, non-uniform stamp duty, investment norms that inhibit institutional participation, and the absence of a secondary market.