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George Cherian
MUMBAI, Sept 16: The Department of Company Affairs (DCA) is expected to make credit rating of privately placed debt mandatory. According to rating industry sources, the DCA will pass an order to this effect in the next few months.
With the economy in doldrums and most corporates hit hard by the industrial downturn, the private placement route has become an attractive option since corporates can raise funds without getting themselves rated.
While corporates raised Rs 15,066 crore through the private placement route in 1996-97, accounting for 49 per cent of the total debt mobilised, in 1997-98, the private placement market accounted for a massive 85 per cent of total resource mobilisation, at Rs 27,069 crore.
During the current year alone, corporates, financial institutions and public sector undertakings have raised close to Rs 7,000 crore through the private placement route. "Though some top-rung corporates, on the insistence of investors, have been getting themselves rated for private placements, it isthe mid-rung corporates that have been avoiding the credit rating process," said a rating agency official.
Rating industry officials said that there have been instances where corporates wanting to raise debt have rejected the low ratings assigned to their debt programmes, opting instead for the private placement route. "The private placement is pushed through by the merchant bankers by offering high coupons to investors," said the chief of a credit rating agency.
During the last year, it was mostly public sector undertakings that resorted to the private placement route. A number of these companies, in fact, used the ratings assigned to their public debt issues to convince investors of subscribing to their private placement programmes.
"Companies have been pushing through their public issues in the garb of private placements and so Sebi is not in a position to bring these issues under their purview. A lot of investors have been promised that the debt issues will be listed but nothing has been done,"said an official at Sebi.
Sebi, at a board meeting held earlier this year, made it mandatory for companies to get themselves rated for the issue of debt instruments of tenures of less than 18 months. Prior to this, corporates were floating debt instruments of tenures of less than 18 months and then rolling them over, in order to escape getting their debt programmes rated.
Though the informal group on primary market, headed by Shankar N Acharya, recently suggested that the facility of private placement should be restricted to not more than 99 qualified institutional investors, the proposal is yet to be implemented.
Sebi further suggested to the Parliamentary Standing Committee on Finance that private placement should be restricted to not more than 50 investors. "Till such time there is a revision on this front, merchant bankers to private debt placement will have it easy finding investors," a rating analyst said.
Welcome move
As and when the DCA decides to make it compulsory for privatelyplaced debt issues to be rated, it will provide rating cover for the entire gamut of debt instruments. Private placements have become a convenient route for raising funds since the 18-month debenture option was removed as a result of making rating compulsory for these instruments as well and due to the loose regulations surrounding the constitution of private placements. This is a welcome move on the part of the DCA and the sooner it is implemented the better.
INSIGHT
As and when the DCA decides to make it compulsory for privately placed debt issues to be rated, it will provide rating cover for the entire gamut of debt instruments.
Private placements have become a convenient route for raising funds since the 18-month debenture option was removed as a result of making rating compulsory for these instruments as well and due to the loose regulations surrounding the constitution of private placements. This is a welcome move on the part of the DCA and the sooner it is implemented thebetter.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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