INDIA (DOMESTIC FIRMS): An Introduction to Capital Markets: Debt

Indian Debt Capital Markets – Outlook for FY 2024-25 

India’s corporate debt securities market touched an all-time high in fiscal year 2024. On May 29, 2024, S&P Global Ratings revised its outlook on India to positive from stable and affirmed 'BBB-' long-term and 'A-3' short-term unsolicited foreign and local currency sovereign credit ratings. According to Fitch and S&P Global “India is poised to remain one of the fastest-growing countries globally in the next few years” with both rating agencies predicting a GDP growth rate between 6.5% to 6.8% for Fiscal Year ending 2025.

Public debt issuances amounting to INR191.67 billion were concluded during the year, a significant jump from last year’s INR92.21 billion (a 207% year-on-year increase). A total of INR9,978 billion was mobilised through private placements during the fiscal year, which is a 17% year-on-year increase (It is typical for debt securities in India to be issued through private placement with bilateral pricing).

Private corporates availed privately placed debt securities amounting to INR 4,964.46 billion in FY 24 (a 44% year-on-year increase). The most typical maturity period for corporate debt securities was either long term (>10 years) or medium term (three-to-five years). Indian corporates can also issue offshore bonds denominated in rupees or other foreign currency (termed external commercial borrowings, ECBs). Indian companies raised INR 3,790 billion through overseas borrowings (including ECBs) during FY 24.

A strong domestic appetite for capital and credit from mid-market companies, healthier corporate and bank balance sheets and India’s rapid and sustained economic growth acted as the galvanising forces for enabling this growth in India’s debt market. Recent inclusion of the Indian Government Bonds in the JPMorgan - Emerging Market (EM) Bond Index is also expected to have a very positive impact on the inflow of foreign debt in the private sector as well. While to begin with India will have a 1% weight in the JPMorgan EM Bond Index, but it is expected to gradually rise to 10% by March 2025. The inclusion is estimated to bring USD20-22 billion of inflows into the India bond market.

Regulatory Snapshot: Looking Back at Recent Changes 

The Indian securities market regulator (the Securities and Exchange Board of India, SEBI) introduced several changes to improve the participation and transparency of India’s debt capital markets. Every listed Indian corporate having outstanding long term borrowings exceeding INR10 billion and a secure credit rating must raise at least 25% of its qualified borrowings by issuing debt securities. Termed ‘large corporates’, such entities must comply with this requirement over a contiguous period of three years. SEBI has adopted a stick and carrot model for its enforcement. While ‘large corporates’ exceeding these requirements receive commensurate discounts on their listing fees and credit - in contrast, ‘large corporates’ falling short of this 25% threshold must make commensurately higher contributions to a fund maintained by the exchanges.

SEBI has also aligned India’s disclosure requirements with those applicable in jurisdictions with more mature debt markets. In place of the exhaustive placement memorandum for each issuance, after April 1, 2024, issuers of debt securities can issue a one-time / shelf disclosure document (termed the general information document, GID). The GID is valid for one year from the opening of the first offer of debt securities. The GID is supplemented by a fresh key information document (KID) for each issuance. The KID contains all issue specific details and material updates/ changes from the GID. By simplifying and expediting the disclosure requirements for debt issuances, the regulatory framework encourages cost-effective borrowings. The disclosure requirements are now uniform for public and private debt issuances, encouraging greater transparency to investors of unlisted debt instruments.

In a bid to further bridge the information asymmetry across the listed and unlisted debt instruments, SEBI has also introduced a new mandatory listing requirement. Any company having outstanding listed debt making a fresh debt issuance on or after January 1, 2024, must mandatorily list such subsequent issuance. These measures are expected to ensure enhanced transparency in the Indian bond market and also augment investor confidence.

Emerging Market Trends 

Last year witnessed the highest levels of foreign portfolio investor (FPI) debt inflows in a decade – with FPIs investing approximately USD14.4 billion. This surge can be attributed to several factors, including the announcement of listing Indian government securities on prominent global indices such as the JP Morgan Chase and Bloomberg Emerging Markets Index. The inclusion of Indian government securities in these indices has not only enhanced the visibility and attractiveness of Indian debt securities but has also instilled confidence among foreign investors, leading to increased inflows.

Moreover, recent initiatives aimed at facilitating the issuance of debt securities in the Gujarat International Finance Tec-City (GIFT IFSC) have catalyzed the growth of India's debt capital markets on a global scale. The establishment of a conducive regulatory environment under the International Financial Services Centres Authority (IFSCA), the sole regulator within the GIFT IFSC, has rendered the issuance of debt securities, making it a seamless and convenient process for market participants. Notably, the cumulative issuance of USD54.75 billion worth of debt securities listed through the GIFT IFSC underscores its growing prominence as a preferred destination for raising debt.

There is also an increasing focus on environmentally conscious investments, with the Indian government setting ambitious climate commitments. SEBI notified a new framework governing environmentally conscious ‘Green Debt Securities’ (GDS) which can only be used for green purposes (such as renewal and sustainable energy, clean transport, sustainable waste management, blue bonds and yellow bonds). If used for any non-green purpose, the issuer of the GDS must offer early redemption to its holders. The issuers of GDS must (on a comply or explain basis) appoint a third-party reviewer/certifier for assessing/ certifying the above pre-issuance and the post issue disclosures.

Future Outlook 

S&P revised the Banking Industry and Country Risk Assessment for India upwards to '5' from '6' last year. This was on the back of a strong recovery by Indian banks as according to S&P ‘the banking system has unwound imbalances and sharply reduced the high stock of problem assets accumulated during the previous downturn’.

India's debt capital market exhibit promising growth trends, underpinned by the Indian government’s commitment to increase infrastructure spending and a robust pipeline of opportunities. Alternative financing options like green debt are gaining traction, with a policy push from the Indian Government towards ESG with a particular focus on increasing production of renewable energy.

While systemic challenges persist, the dynamic regulatory changes and the collaborative efforts between market participants and regulators signify a positive outlook for overcoming such hurdles. With a buoyant growth trajectory and a dynamic landscape, India's debt capital markets stand poised for continued expansion, ushering in inclusive and sustainable economic development