Market watchdog calls on RBI, IRDAI and PFRDA to ease investment restrictions to facilitate infrastructure financing
Calling for a freer flow of funds from provident and pension funds, insurance companies and banks to corporate and infrastructure debt, Indian capital markets regulator SEBI urged the RBI, IRDAI and the PFRDA to relax investment restrictions in order to make the bond market a more functional source of financing for industrial and infrastructure projects.
As banks struggle to provide long-term capital, two members of the Securities Exchange Board of India over the past week called for an urgent overhaul of the investment standards specified by SEBI’s peer financial regulators for participation in the corporate bond market. This would facilitate a faster economic recovery, they stressed.
Observing that even though there were several players in the debt market, the number of participants in each investor category remained limited due to current standards, thus limiting the pool of available liquidity, said Ananta Barua, permanent member from SEBI at a FICCI Capital Markets Conference.
Listing cases of restrictions that limit insurers’ exposure to private debt and infrastructure finance, he said the recent authorization granted to pension funds to invest up to 5% of their corpus in corporate trusts. infrastructure investment (INVIT) was unlikely to work.
The approval of the Pension Fund Development and Regulatory Authority (PFRDA), Mr Barua said, was tied to whether the INVIT had a minimum credit rating of ‘AA’ or equivalent for the sponsor as well as ‘a rating from two rating agencies.
“It should be understood that INVIT’s ratings and the ability to service the debt are based on the project’s cash flow and have nothing to do with the sponsor,” he said, adding that infrastructure projects were generally rated “BB” or less. in the initial stages.
The RBI’s Partial Credit Guarantee Enhancement Standards to help these projects achieve higher credit ratings face practical challenges, while the Centre’s plan to create a credit improvement guarantee company, announced in the 2019 Union budget has not yet taken off. The central bank’s partial credit guarantee standards limit the extent to which a bank can provide credit enhancement to 20% of the issue size.
“This means that it would take at least three banks to get a 50% credit enhancement (necessary to go from, say, a ‘BBB’ to ‘AA +’ rating required by insurers and PFs) and it was hard to get three banks to provide this for a single project, ”said Barua. “Therefore, it may be necessary to review this ceiling,” he added.
Another SEBI member, G. Mahalingam, speaking at an Assocham meeting on funding sources, warned that relying on banks as an exclusive source of funding was not going to be positive for the economy and that further action was needed from other regulators for the bond market to develop. .
“I would still say that pension funds and insurance companies need to be a little more open. There are areas where other regulators will also need to play a more proactive role, ”he said, calling for“ a huge shift in mindset ”that limits corporate bond exposures for regulated entities.
“In the RBI’s Liquidity Adjustment Facility (LAF), corporate bonds are never accepted as collateral. It’s not allowed by law, but it’s not a big deal; you have to present it to the government, find a good rationale and it could be done. Today, it is not accepted under the LAF and not even included in the statutory liquidity ratio (SLR), ”he said.
“We have to rethink. I’m not saying they should take some bad bonds, but at least you can start with the top rated bonds when it comes to the SLR facility. Even for the liquidity service ratio, the Basel guidelines provide for AAA obligations there, ”Mr. Mahalingam said.