INDIA (DOMESTIC FIRMS): An Introduction to Capital Markets: Debt

Introduction 

While 2020 was a volatile year for capital markets due to the COVID-19 pandemic and the resultant upheaval in global economic activity, the market emerged from this turmoil significantly by 2021. The debt capital market was one of the fastest to recover as the disruptions in supply chain and prolongation of closures did not directly impact the market.

This was bolstered by the fact that the rates of interest globally were at an historical low in 2020 and continued to remain so into 2021, subsequently leading to a lower cost of borrowing. This encouraged India Inc. to raise funds through the corporate bond market for refinancing of existing debt, capital expenditure and expansion. Consequently, heading into 2022, fixed income markets saw a significant increase in year-on-year growth.

The Russia-Ukraine conflict and the fears of an imminent recession leading to a global economic slowdown in the aftermath of the COVID-19 pandemic saw the Indian markets witness an efflux of USD16.5 billion in the calendar year 2022 by the foreign investors. While Indian investors continued to invest domestically, despite the market volatility, the medium-term global outlook remained uncertain. This uncertainty impacted the capital markets in India. Although the above figure of USD16.5 billion was not limited exclusively to debt capital markets, it did point towards a trend of foreign institutional investors choosing to hedge their bets by investing in relatively safer options as opposed to the emerging markets. Due to these factors coupled with high coupon rates, there were fewer international bond issuances by Indian companies in 2022. However, as inflation rises, interest rates are bound to be increased to stem the rise, which in turn will impact market liquidity. This could act a catalyst for increased debt issuances, both offshore and domestically.

Recent market trends 

The Indian regulators, most notably the Securities and Exchange Board of India (SEBI), have taken cognizance of the aforesaid short and medium-term developments by introducing various options for fundraising through the debt capital markets.

SEBI has completely revamped its existing framework for issuance of domestic debt securities to increase transparency, disclosures for investors and also to deepen and encourage trading in debt securities. It has simplified and structured the issuance of debt securities by consolidating all the regulations and procedures required thereto. SEBI has integrated the distributed ledger technology into its existing infrastructure for continuous covenant monitoring and collateral related compliances. The timelines with respect to issuance of listed domestic debt securities have also been streamlined with a view to providing the investors the benefit of immediate trading of debt securities. Enhanced corporate governance and additional disclosures and thresholds for ‘high value’ listed debt securities - ie, greater than USD62.5 million - have also been introduced.

Further, SEBI has also streamlined the functioning of the online bond trading platforms which provides an avenue for investors, particularly non-institutional investors, to access the debt securities market.

Registration as a stockbroker on the debt segment of the stock exchange coupled with having in place the necessary technological infrastructure is a requirement for registering as a trader on the bond trading platform. The ambit of the existing ‘request for quote’ platform on the debt segment has also been widened by SEBI with a view to enhancing liquidity on the platform and broad basing the investor and issuer pool to include various other market participants.

The central government, in consultation with the Reserve Bank of India (RBI), has also revamped the existing framework in relation to overseas investments. Introduction of overseas portfolio investment, redefining overseas direct investment and linking it to control, introducing investments in the strategic structure and a clarity on round-tripping have been seen. This will benefit secured debt issuances where foreign entities have raised funds with support, security or guarantee from Indian entities which have made overseas direct investment in such foreign entities.

There has also been a significant push to sustainable financing models with an emphasis on renewable energy, reduction of carbon footprint and overall sustainable growth. Foremost amongst this is green debt security which has been on the statute books since 2017. As organisations have grown increasingly climate-focused (due to a slew of regulatory changes both domestic and international), green bonds or green debt security has emerged as a probable avenue for fundraising. India has also outlined its commitment at the United Nations Climate Change Conference 2021 (COP26), including lowering of the total project carbon emission, meeting 50% of the country’s need through renewable sources and commitment to achieve net zero emissions by 2070. To further these goals, SEBI has proposed increasing the scope of green bonds. Re-evaluation of the disclosures around use of proceeds, impact reporting, certification, taxonomy and various other standards have also been proposed.

The Union Budget for 2022 has also recognised sovereign green bonds as a part of the government’s overall market borrowings for 2022-23. These bonds will be issued for mobilising resources for green infrastructure and the proceeds from their issue will be deployed in public sector projects which help in reducing the carbon intensity of the economy. The government has also sought to facilitate sustainable and climate finance in the country through GIFT City, India's first International Financial Services Centre. In 2022 there have been a few issuances of green bonds through the GIFT City, including Indian Railway Finance Corporation Limited’s issuance of USD500 million, IndusInd Bank’s issuance of USD400 million, and Axis Bank’s issuance of USD600 million. Prior to that, other companies such as Adani Green Energy UP Limited, Parampujya Solar Energy Private Limited, Prayatna Developers Private Limited and ReNew Wind Energy Delhi Private Limited have also listed their green bonds in GIFT City. The government is targeting issuing sovereign green bonds to the tune of USD1.9 billion between October 2022 to March 2023.

The government’s impetus to sustainable financing is welcome as it decreases reliance on more traditional sources of financing for projects which are eligible for sustainable financing. Having a dedicated pool of funds for sustainable financing and easing compliance would aid in making it more attractive to the industry which has seen 26 issues of green bonds as of May 2022. It will thus be interesting to see whether the latest initiative of ‘blue bonds’, which is still at a nascent stage, will complement the existing framework for sustainable financing. Blue bonds focus on the ‘blue economy’ which is ‘sustainable use of ocean resources for economic growth, improved livelihoods, and jobs which preserving the health of the ocean’s ecosystem.’

The private credit space has also seen a rise in investments which is evident from RBI’s continual increase in the available limits to foreign portfolio investors (both under the general route and the voluntary retention route). Under the general route, the limits have been revised from USD3.27 billion in the half-year of April to September 2018 to US8.20 billion in the half-year of October 2022 to March 2023. Similarly, for the voluntary retention route, the limits have been revised from USD1.84 billion in the half-year of January 2020 to USD3.07 billion in February 2022.

The practice surrounding debt capital markets in India is constantly evolving. The recasting of existing processes and procedures has certainly come at the right time as it will encourage investors to be more optimistic, keeping in mind the potentially upward trajectory which the Indian economy is capable of.