Par Committee may change current reference rate for bonds

The Parliamentary Standing Committee on Finance that is vetting the new Companies Bill is likely to make a key proposal for easing the liquidity crunch in the corporate bond market. As per the proposed change that is being considered by the committee is the removal of bank rate as the reference rate for issuing bonds, reports Ronojoy Banerjee of CNBC-TV18.

One issue that has been brought to the Standing Committee notice is the liquidity crunch in the corporate bond market. Currently, as per the existing Companies Act the interest charged on corporate bonds has to be over and above the existing bank rate, which has also been proposed in the new Companies Bill. From 2003 onwards, the bank rate has been more or less the same at about 6%. In that sense there was no issue. But recently the RBI, in February, increased the bank rate from 6% to as high as 9.5%, which was subsequently brought down to 9%. Any company who wants to issue a bond, the interest charged on that has to be over 9%. This according to the Standing Committee of Finance is simply not tenable.
They are likely to propose that instead of making the bank rate the reference point, they should look at making the government securities of equal maturity, which would be a percentage or two below bank rate as reference points for inter corporate bonds. CNBC-TV18 sources in the corporate affairs ministry said that they don’t have any problem with this proposal which was first mooted by SBI Caps and they said that if the Standing Committee were to send this proposal in their report to MCA, it is likely to be cleared. Also watch the accompanying video.