Indian companies raised far more money via debt markets during the April-June quarter than a year earlier while equity fundraising plunged as the coronavirus pandemic hammered stock markets.
Equity fundraising nearly halved to about Rs 67,000 crore during the three months through June from Rs 1.28 trillion a year earlier because of higher volatility, the chief of the Securities and Exchange Board of India said.
Ajay Tyagi said also that Indian companies raised Rs 2.1 trillion via corporate bonds during the first quarter of the fiscal year 2020-21 compared with Rs 1.67 trillion in the same period last year.
Total debt and equity fundraising fell to Rs 2.77 trillion from Rs 2.94 trillion, he said at a conference organised by industry group FICCI.
“The overall situation is not all that bad, especially considering that fund raising this year started only from May onwards. There is no cause for despair,” Tyagi said.
India’s benchmark stock indices had plunged in late March, in line with global markets, as the pandemic began spreading and the government imposed a nationwide lockdown that lasted more than two months.
However, the stock markets have recovered most of the losses since then. The National Stock Exchange’s 50-stock benchmark Nifty has soared almost 48% between March 24 and July 20.
New idea for new investors
The SEBI chief observed that there had been an uptick in demat account openings and said that first-time retail individual investors may be looking for newer investment opportunities. India has nearly 40 million demat accounts.
“The fact that there is also a surge in opening up of demat accounts suggests that many of these retail investors are perhaps first-time investors in the stock market. Many analysts have quoted the lack of other investment opportunities as one of the reasons for this phenomena,” Tyagi said.
Tyagi urged policymakers to issue government securities (G-Secs) in dematerliased format to enable retail investors to invest in such risk-free instruments followed by other forms of securities as they gain investment experience.
The suggestion comes at a time when the government’s fiscal deficit is widening because of a slowing economy, falling tax collections and rising expenditure to battle the pandemic.
Currently, retail investors cannot directly invest in G-Secs. However, they are allowed to invest through multiple channels in treasury bills and Government of India dated bonds in the primary markets.
In its budget in February, the government had proposed a debt exchange-traded fund comprising G-Secs after seeing demand for its Bharat 22 Fund.
Tyagi also called for “unification of financial markets” by allowing integration of corporate bond and G-Sec markets for increased participation from a wide variety of investors and for better price discovery.
“There is an inter-linkage between the corporate bond market and G-Sec market. Typically, the pricing of corporate bonds is benchmarked to that of G-Sec of the corresponding maturity. However, in India, trading in G-Secs is concentrated only in the 7-10 years’ maturity bucket,” said Tyagi.
“There is a long way to go to have a continuous yield curve for G-Sec. This affects pricing of corporate bonds.”
Tyagi said India’s corporate bond activity has seen increased activity in the past five years. But most of the trading in corporate bonds is limited to only top-rated paper, he said.
In India, around 97% of the activity taking place in top three categories – AAA, AA+ and AA securities. In contrast, only 5% of the corporate bond activity in the US occurs in top three-rating buckets and 75% of the trading takes place in the subsequent three-rating buckets of A, BBB and BB, Tyagi said.
Tyagi also said that deepening of the corporate bond market will help the government reduce the burden on banks, especially state-run lenders that are battling massive bad loans.