Mumbai: Indian firms including a majority of NBFCs together raised a record Rs 1.75 lakh crore through CPs directly from the market in the first fortnight of November to fund the big-ticket IPOs during the fortnight even as large corporates are slowly opening up to bank borrowings. About one-third of these issues were of the minimum tenors that worked well to fund the IPO demand.
Indian firms issued commercial papers (CPs) worth Rs 1.75 lakh crore during the fortnight ended November 15, the latest Reserve Bank data indicated. CPs outstanding amounted to Rs 4.5 lakh crore
” Almost a third of the amount raised is likely to have gone towards funding IPOs. Entities with brokerage arms have found the CP route very cheap to use the proceeds for lending High net worth clients for IPO. With borrowing cap on NBFCs for IPO funding applicable only after April, there is no restriction on the amount they can raise now, therefore companies may prepone to avoid the restriction” said Soumyajit Niyogi, Associate Director at India Ratings
The rating firm has observed this trend during the June-August IPOs. “Non-banking financial companies (NBFCs) have been gaining the advantage of the excess liquidity and a favourable environment for tapping CP markets to raise short-term debt for financing initial public offers (IPOs)” said a report by India Ratings. ” The months of June, July and August 2021 witnessed heavy activities in the IPO market and many NBFCs were active in funding IPOs”.
One of the advantages for a CP issuer is that is a cheaper source for short-term funding besides the flexibility of tenor from seven days to up to a year. Some of them have borrowed funds at as low as 3.38 per cent, the RBI data indicates. This is lower than the prevailing repo rate – 4 per cent. While the marginal cost-based lending rates offered by commercial banks for comparable tenor is even higher.
The gap between CP rates and the marginal cost of the funds-based lending rate will remain a driving factor for more CP issues in the near-to-medium term. A sustained rise in commodity prices worldwide and looming supply-side shortage in various spectrums could pose challenges to the short-term rates.
Ind-Ra has released its Corporate Credit Profile for 1HFY22. As per the agency, the upgrades in the system have improved in a meaningful way. The overall trend suggests rating actions are largely tilted towards upgrades, despite the second wave during this period. Ind-Ra opines the healthy credit quality of corporates, reflected in improved upgrades, will be positive for credit risk premium; therefore, interest rates are to remain soft for higher-rated borrowers.
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