Non-banking financial companies (NBFCs) such as Rural Electrification Corporation (REC) and Power Finance Corporation, which regularly tapped the corporate bond market through private placements, stayed away from this space in April-May, owing to anomalies in the Companies Act, 2013. Due to their absence, corporate bond issuances through private placements hit a five-year low in May, show data from the Securities and Exchange Board of India (Sebi).
Companies raised only Rs 9,070 crore in May, compared with Rs 33,759 crore in the corresponding month last year, the data showed.
According to the Companies Act, 2013, it is mandatory for financial companies to create a corpus to meet repayment obligations for debentures maturing the following year. Besides, the new rules demand the company create a debenture redemption reserve account out of its profits for payment of dividend and the company doesn’t use the amount credited to such accounts for purposes other than the redemption of debentures.
“Fund-raising activity was very low in April and the first half of May due to anomalies in Companies Act. After rectification in norms, NBFCs have begun visiting the market to raise funds through debentures,” said Mahesh Thakkar, director-general, Finance Industry Development. Now, amendments to the rules have been made to restore exemption for NBFCs in the Companies Act, 2013. In the Companies Act, 1956, too, NBFCs had an exemption.
Issue arrangers say now, NBFCs are returning to the market. Recently, REC raised Rs 1,700 crore at 9.02 per cent through five-year bonds. Sources said this was REC’s first issue this financial year. L&T Finance had also tapped the market recently. “There will be a lot of issuances from NBFCs because these norms have been rectified. Assuming interest rates remain at these levels, there might be a lot of borrowing by these companies,” said Arvind Konar, head of fixed income, Almondz Global Securities.
Earlier the effect of the rules varied according to NBFCs’ dependence on debentures to raise funds. While those using bank lines to source funds had seen the least impact, those using medium-term (two-three-year) debentures were under pressure to keep aside a sizeable portion of their funds for redemption.
- Due to the absence of NBFCs such as Rural Electrification Corporation and Power Finance Corporation, corporate bond issuances through private placements hit a five-year low in May
- According to the Companies Act, 2013, it is mandatory for financial companies to create a corpus to meet repayment obligations for debentures maturing the following year