Companies Turn To Bonds, CPs For Funds

Companies that raised funds in the first quarter of the current financial year preferred to do so through issue of bonds and commercial paper due to uncertainties in the capital market and banks’ reluctance to lend short-term funds.

The change was visible in the resource mix of companies in the quarter that saw funds flow to corporates dipping by 40% year-on-year. Resources mobilised through bank credit and public issue of shares dipped by over 80% in the quarter compared with the year-ago period.

Reliance of corporates on bonds through private placements and commercial paper (CP) increased by 41% and 72%, respectively, in the quarter, compared with the same quarter last year.

Foreign fund inflows through foreign direct investments (FDI), external commercial borrowings (ECBs), short-term debt and trade credits dipped by 60%. However, FDI still accounted for over 20% of the funds used by Indian businesses during the period.

Corporates raised Rs 29,135 crore and Rs 35,460 crore, respectively, through private placement of bonds and commercial papers, compared with Rs 16,955 crore and Rs 25,104 crore, respectively, in the year-ago period. They borrowed only Rs 11,735 crore from banks, compared to Rs 37,364 crore in April-June 2008.

As banks showed a reluctance to lend freely due to sluggish economic sentiment, companies turned to commercial papers to raise funds. For them, CPs turned out to be a cheaper option with average discount rate on the instrument ranging between 5% and 6%, as against benchmark prime lending rates (BPLR) of commercial banks that ranged between 10% and 16%.

“Bankers preferred to park funds in MFs and gilts and have been reluctant to lend for shorter tenors. With no takers for bonds, corporates have resorted to raising shorter-term funds through CPs,” said Sidhartha Roy, economic advisor to the Tata group.

Even if a top-rated corporate managed to get loans at 300 basis points below BPLR, CPs still worked out to be cheaper. Several corporates managed to raise cheaper funds through private placement of bonds. Among the large issuers in the CP market were HPCL, ONGC, SAIL, Sundaram Finance, L&T Finance and Bajaj Auto Finance.

An official with HPCL, which regularly taps the CP market for its short-term funding requirements, said the company preferred to raise funds through this (CP) route whenever it was cheaper. Most corporates prefer to raise funds in a similar fashion, he said, requesting anonymity.

Jayesh Mehta, country treasurer, Bank of America Merrill-Lynch, said banks indirectly funded the businesses by parking funds with MFs. This is because MFs have been the largest subscriber to the CPs issued by corporates and NBFCs. For MFs, other investment options, such as gilts and equities, were not so attractive during the period, he said.

As for private placements, much of it happens through qualified institutional placements (QIP), said Mr Roy. Many private equity players prefer this route these days, he said. According to a Crisil study, Indian companies raised over Rs 12,500 crore this year through QIPs.

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