Must examine why firms prefer private placement of corporate bonds, says RBI Deputy Governor Rabi Sankar

There is a need to examine why firms primarily prefer private placement of corporate bonds over public issues, a deputy governor of the Reserve Bank of India (RBI) said on August 24.

A private placement is a sale of bonds to pre-selected investors and institutions rather than on the open market.

“There is an overwhelming preference for private placement,” T Rabi Sankar said in a speech delivered at the Bombay Chamber of Commerce & Industry. “A hard look at the underlying issues including the reasons for issuers preferring to eschew the public issuance process is perhaps called for.”

According to Sankar, a large bulk of corporate bond issuances every year is through the private placement route rather than through public issuances. In FY22, the amount of money raised through public issuances of corporate bonds was Rs 11,589 crore – just about 2 percent of the amount of money raised through private placement at Rs 5.88 lakh crore, he said.

The deputy governor said that India’s corporate debt market is dominated by highly rated issuers. He elaborated that in FY22, ratings were assigned to 1,235 corporate debt securities amounting to Rs 22.55 lakh crore. Of these, 278 or 22.5 percent were rated AAA and 358 or 29 percent were rated AA. Only 66 issuances or 5.3 percent of issuances were non-investment grade.

Moreover, retail participation in corporate bonds remains low, Sankar said, stating that investors in debt-oriented mutual funds are also largely institutional. Foreign participation in corporate debt, has also not been favorable to secondary market activity, he said.

Hence, the government, regulators and the participants of the corporate bond markets themselves should deliberate on the incentives to broaden the investor base in the corporate bond market, attract foreign investment and regulated entities to participate more actively in risk markets, “without compromising on prudential considerations,” added Sankar.

The corporate bond market should move towards the next level of development and fulfil its potential as the major avenue for resource mobilisation in the country, the deputy governor said.

“Efforts need to focus on improving complementary – repo and derivative – markets, diversify the investor base, both domestic and global, and improve access of borrowers at the lower end of the credit spectrum,” Sankar said. “Beyond this, market development and improvements will remain a continuous exercise.”