PremiumMUMBAI : Market regulator Securities and Exchange Board of India (Sebi) is reluctant to offer a moratorium deal to nearly ₹1 lakh crore of commercial paper and bond repayments coming up in the first quarter of current fiscal by allowing them to extend their maturity, said two people aware of the matter.
Many of these issuers, facing repayment concerns and liquidity crisis due to the prolonged lockdown, have sought Sebi’s approval for rolling over the maturity of the papers as a relief measure.
Many state governments on Saturday announced that they are extending the lockdown beyond 14 April to contain the spread of covid-19.
Sebi believes that this money is owed to consumers, including retail investors, and granting a moratorium on repayment will create hardships for them.
“Banks have given moratorium to consumers on what is owed to them under the central bank relief. In the case of bonds, the payment is owed to consumers. At a time when there is a need for cash in the hand of consumers, stalling or delaying these payments under regulatory mechanism will create unnecessary hardships to subscribers which includes not just banks but mutual funds and retail investors," said an official aware of the matter. He declined to be named.
In case of mutual funds (MFs) who have invested in these papers for their debt schemes, the regulator wants MFs to handle any default or delay in repayment based on prescribed fair valuation policies.
According to Prime database data, corporate bonds worth ₹91,902 crore and commercial papers worth ₹77,797 crore are coming up for maturity at the end of May 2020. Besides, ₹47,579 crore worth corporate bonds with ratings below AAA are due for maturity over the next two months.
The bond issuers and bankers had written to Sebi seeking permission for rolling over the Non-Convertible Debentures (NCDs) and corporate bond repayments to tide over this crisis.
"Letter has been sent to Sebi for considering this request. Both Sebi and Reserve Bank of India (RBI) should work in sync. If bankers can grant moratorium, why can't Sebi give moratorium on corporate bond repayment?" said a senior banker.
The central bank on 27 March after its monetary policy review said financial institutions are “permitted" to grant a moratorium, meaning it is at the discretion of banks to give a moratorium.
The RBI's dispensation on loan repayment do not include allowing moratorium for corporate bonds or commercial paper.
“With cash flows being impaired and companies finding it difficult to raise cheap funds, bankers believe that the markets regulator should allow rollover of these papers which are due over the next 2 months," said a market participant.
To tide over the bond repayment other option is refinancing these bonds by raising funds under the Targeted Long-Term Repo Operation (TLTRO) facility allowed by the RBI.
“However, the results of TLTRO auction have shown that banks are investing only in the corporate bond papers of companies with AA rating and above," this person added.
The markets regulator also believes that the debt schemes who have invested in the commercial papers and NCDs due in this quarter have a number of options for determining Net Asset Value (NAV) of these schemes.
“Giving a moratorium will pose an issue for mutual funds as these schemes have a fixed maturity and they have to repay the investors. And their first obligation is towards investors not issuers. The asset management companies (AMCs) in case of non-repayment of bonds should use the available dispensation of fair valuation policy, side pockets in the best interest of investors," said a second official he too declined to be named.
Under the fair valuation policy any default makes the paper below investment grade. But the AMCs can deviate from this valuation after taking approval from trustees.
In addition, AMCs can segregate the assets which are facing repayment crisis in the so-called side-pocket without affecting the NAV of the overall scheme which contained healthier paper.
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