Indian defaults spark rules that drag bond sales to 13-year low

Indian defaults spark rules that drag bond sales to 13-year low

By Divya Patil

Rising defaults have prompted India to tighten oversight of corporate bond sales, causing issuance to slump in a blow to a long-sought goal of expanding the market.

Offerings of rupee notes have fallen to 34.4 billion rupees ($463 million) this month, the slowest start to a financial year since 2008. That’s due in part to rules that took effect April 1 strengthening the role of trustees for secured bonds backed by assets. Such offerings have made up about 60% of India’s total domestic issuance in the last 10 years.

Firms defaulted on at least 52 billion rupees of domestic bonds so far this year, the most on record for a similar period. That comes as a setback as Covid-19 cases surge recently. It also reverses the trend from last year when unprecedented stimulus helped the pace of non-repayment slow from an all-time high in 2019.

bond saleBloomberg

What The New Rules Do

  • Starting this month, bond trustees need to evaluate and ensure that assets backing bonds are at all times adequate to discharge the interest and principal amount.
  • They have to carry out checks and validate that the issuer has the necessary permissions from lenders in case the company creates any further charge on the asset.
  • The trustees also need to provide ‘due diligence certificates’ to the issuer at the time of filing a draft offer agreement and before the notes are listed.

What’s Next

  • Some bond arrangers see the slowdown in the primary market as temporary, and expect issuance to pick up as companies comply with the new regulations.
  • Issuance of unsecured bonds, which aren’t covered by the rules, may roll on. Bankers say offerings of such notes from government-owned companies that tend to sell them should continue apace.
  • State-run REC Ltd. is seeking bids for as much as 40 billion rupees of unsecured notes maturing in 2024 on Monday.

–With assistance from Suyash Singhal.

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