Mumbai: Indian financial institutions, state-owned firms and private companies raised a total 3.51 trillion in the local corporate bond market through private placements in the fiscal year ended 31 March, an increase of 39% from the preceding year, according to data compiled by Prime Database.

Indian regulations define private placement as a debt sale in which fewer than 50 investors participate.

Financial institutions and banks continued to dominate the Indian debt market, raising 1.84 trillion, or 52% of the total amount raised during the year, up 15% from 1.6 trillion raised in 2011-12.

Private companies saw the sharpest increase, raising 1.13 trillion, almost double the 59,062 crore raised in 2011-12.

Companies flocked to the debt market last year because of a large differential in corporate bond yields and bank loan rates, said Shashikant Rathi, head of debt capital markets at Axis Bank Ltd.

“A company seeking loans from banks would get it at an annualized rate of about 11% for a three-five year loan, whereas 10-year money in the local bond market was available at 8.5-9% making the differential as high as 200-250 basis points," Rathi said. One basis point is 0.01%.  

The differential in the lending rate to the corporate bond rate has become more pronounced after the Reserve Bank of India (RBI) introduced the base rate system in July 2010. Base rate is the rate below which banks are not allowed to lend.

Since banks could not lend below base rates, they helped companies sell bonds to investors in the corporate bond market, Rathi said. Axis leads the corporate bond league table helping sell 1.5 trillion worth of corporate debt last fiscal, up 43% from 2011-12, he said.

The sharp rise in placements has not created a new set of investors, but just allowed banks to bloat their balance sheets using credit substitutes, said Rudraksh Bhatt, vice-president at Darashaw and Co. Pvt. Ltd, a corporate bond broker. “These bonds have been bought mostly by private sector banks like Yes Bank Ltd, Kotak Mahindra Bank Ltd and Axis Bank as a result of which the amount of bonds in their portfolio has jumped four to ten times."

Yes Bank, for example, has increased the proportion of corporate bonds in its balance sheet in 2012-13. From 8,131 crore of corporate bonds or 18% of customer assets in 2011-12, Yes Bank bought 13,356 crore or 22% of customer assets as bonds in 2012-13. Such credit substitutes contributed 17-18% to Yes Bank’s total interest income, managing director and chief executive officer (CEO) Rana Kapoor said in a press conference in April.

To be sure, the banks sell these bonds in the secondary market to investors like insurance companies and pension funds.

Companies such as Hindalco Industries Ltd, Sterlite Industries India Ltd arms of engineering and construction giant Larsen and Toubro Ltd and Reliance Industries Ltd have used the bond route to raise money last year, Bhatt said. “For banks this is a good way of maintaining relations with their clients and for companies it is cheaper long-term money. I expect these bond sales to continue even this year."

The share of government organizations and financial institutions dropped to 68% in the last fiscal from 77% in the previous year.

Housing Development Finance Corp. Ltd led the issuers list with placements worth 33,180 crore, followed by Power Finance Corp. Ltd ( 30,277 crore) and Rural Electrification Corp. Ltd ( 21,782 crore).

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