Privately placed debt issuance, ECBs surge on lower cost of funds
- September 29, 2024
- Posted by: OptimizeIAS Team
- Category: DPN Topics
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Privately placed debt issuance, ECBs surge on lower cost of funds
Sub: Eco
Sec: External sector
Context:
- Over the past three years, corporates have increasingly turned to private debt placements and external commercial borrowings, with both methods seeing a significant surge in funds raised.
Increase in Privately Placed Debt:
- Funds raised through privately placed debt rose to ₹9.8 lakh crore in 2023 from over ₹6.52 lakh crore in 2021.
- Privately placed debt is a type of debt financing where a business or institution sells securities to a select group of investors, rather than publicly.
- It offers a way for companies to raise capital without having to meet the same legal and disclosure requirements as public offerings.
External Commercial Borrowings (ECBs):
- Over ₹3.4 lakh crore was raised through ECBs in 2023.
- External Commercial Borrowing (ECB) refers to the borrowing of funds by Indian companies from foreign lenders. ECBs can be in the form of loans or bonds.
- More companies are opting for ECBs due to tax advantages, as there is no withholding tax on interest payments made through ECBs via Gift City.
- ECB loans from development financial institutions (DFIs) are often cheaper than bonds and do not incur additional hedge costs or withholding taxes.
Debt issuance:
- Debt issuance is an approach used by both the government and public companies to raise funds by selling bonds to external investors.
- In exchange, investors receive interest payments on their investment over time, plus the bond’s face value when it matures.
Equity issuance:
- Equity issuance is a strategic process by which a company sells new shares to investors, raising capital without incurring debt.
- The investors who buy these shares become partial owners of the company and may receive dividends or benefit from an increase in the stock price.
Shift from Public Equity to Debt Issuance:
- While public equity issuances and Qualified Institutional Placements remain popular, debt issuances are gaining momentum due to favourable ratings allowing companies to borrow at moderate rates.
- Higher bank credit costs have pushed many firms towards privately placed debt, which is often purchased by mutual funds and insurance companies.
- Banks view loans to NBFCs and unsecured loans as higher risk, leading non-banks to rely more on privately placed debt.
- The BFSI (Banking, Financial Services, and Insurance) sector accounts for the largest debt issuances.
Qualified Institutional Placement:
- A Qualified Institutional Placement (QIP) is a way for companies listed on Indian stock exchanges to raise money by selling shares or other securities to qualified institutional buyers (QIBs).
- Qualified Institutional Buyers (QIBs) are institutional investors that are deemed to have a higher level of financial sophistication and are eligible to invest in certain types of securities without the same level of regulatory oversight as individual retail investors.
- e.g: mutual funds, insurance companies
Bond Market Trends:
- Cheaper Bond Market: The Indian bond market has become less expensive, especially for companies with good credit ratings and strong cash flow.
- The interest rate differential between the US 10-year Treasury yield and the Indian 10-year government bond yield has narrowed to below 2-2.5%, down from the historical range of 5-4%. This has made the Indian bond market attractive.