MUMBAI, Nov 2: Coupons on corporate debt are heading southwards. The Tata and Birla group of companies look set to raise five- and seven-year funds at respective 12 and 12.25 per cent in the next two weeks. Bank of India even plans to go one-up, raising seven-year debt at a coupon of sub-12 per cent.

Merchant-banking sources said triple-A-rated companies belonging to the two groups had drawn up plans to enter the private-placement market to raise funds in the first fortnight of November. "Companies like Indo Gulf, Indian Rayon, along with a few Tata group companies, are planning to raise seven-year funds at 12.25 per cent, signifying a 50-75 basis points drop in interest rates," a merchant-banking source said.

Stronger corporates are benchmarking the coupon rates to the Larsen & Toubro-debt issue, which had, last week, mopped up five-year money (Rs 50 crore) at 325 basis points above the bank rate, currently pegged at 9 per cent. Bank of India, which is in the process of raising long-term subordinate debt to boost its tier-II capital, is awaiting the finance ministry's approval. The bank is planning to raise Rs 500 crore through a debt issue, aimed at shoring up its capital adequacy ratio.

Merchant-banking sources said there was enough of liquidity, and borrowers would not face any problem in securing fine rates.

"Wholesale investors do not want the rates to come down any further, but borrowers will finally win the battle as the system is flush with funds," a banking source said.

In the busy-season monetary and credit policy, announced on October 21, the Reserve Bank cut the bank rate cut by 100 basis points and the cash reserve ratio of banks by 200 basis points in phases to ensure a release of Rs 9,600 crore into the system by the end of the current fiscal.

Corporates are increasingly dumping their foreign borrowing plans and turning to the domestic market as the interest rates are heading southwards. "The AV Birla company, Grasim, has been successful in raising funds through the commercial-paper route at 8 per cent. There are definite signs that corporates can raise funds in the domestic market at a cheap rate," a merchant banker said.

The Industrial Credit & Investment Corporation of India (ICICI) is entering the market in December to raise Rs 300 crore at 12-12.5 per cent. This will be followed by the Rs 750-crore issue of the Industrial Developement Bank of India (IDBI), which is yet to finalise coupon rates. The two institutions are keeping 100 per cent greenshoe option.

Merchant bankers said it was unlikely that corporates in the private placement market would get a finer rate than 12 per cent since incentives would be high unlike in the retail market.

With the two institutions planning to raise Rs 2,100 crore in the next few weeks and Krishna Jala Baghya Nigam, Sardar Sarovar Nigam Ltd and Konkan Railway waiting in the wings to tap the debt market, the crowding-out effect may push the rates up.

"Corporates should rush in before these debt issues hit the market if they want to seek a finer rate," merchant-banking sources said.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.